Please ensure Javascript is enabled for purposes of website accessibility

Where Will AT&T Be in 1 Year?

By Herve Blandin - Apr 28, 2020 at 8:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The novel coronavirus outbreak is pressuring the telecom giant's precious free cash flow.

AT&T (T 0.05%) should remain one of the three telecom leaders in the U.S. for the foreseeable future thanks to the deployment of its 5G and fiber infrastructures. The telecom and entertainment giant is also aiming to offset the decline of its legacy cable TV business with its video-streaming platform, HBO Max.

And because of its significant debt load, AT&T needs strong free cash flow to fund its transformation, reduce its debt, and pay its dividend. But the company's first-quarter results indicate the COVID-19 pandemic represents a significant extra challenge. So, where will AT&T be in one year if that precious free cash flow won't meet management's previous expectations?

How the coronavirus outbreak is impacting AT&T's short-term results

AT&T's first-quarter revenue dropped by 4.6% year over year to $42.8 billion, and non-GAAP (adjusted) operating income decreased by 5.7% to $9.1 billion.  

Besides the secular decline of the company's legacy cable TV business (DIRECTV), the COVID-19 pandemic and its consequences influenced these results.

Management estimated the drop in roaming and the reduction in late fees lowered first-quarter revenue by approximately $50 million. But that gap materialized mostly in the second half of March, which suggests a greater impact during the second quarter, as reduced roaming and late fees are likely to continue beyond April.

In addition, revenue from equipment (phones), down nearly 25% year over year in March, should also decrease during the second quarter because many AT&T stores remain closed.

And unsurprisingly, Q1 revenue from the WarnerMedia segment dropped by $1 billion to $7.4 billion after theaters were shut down, which forced the company to postpone the release of some movies.

A telecommunication network floating above a city at night

Image source: Getty Images.

Reduced free cash flow

Looking forward, management didn't issue guidance on capital expenditures, but during the earnings call, CEO Randall Stephenson insisted on maintaining investments in growth areas such as 5G, fiber, and HBO Max.

Two days later, the company announced Stephenson would retire on July 1 and current COO John Stankey will take over. But I don't expect investment priorities to change: HBO Max remains key to offset the decline of the company's legacy cable TV business. Despite stay-at-home policies, AT&T lost 897,000 cable TV subscribers and 138,000 video-streaming subscribers during Q1 compared to last year. In contrast, during the same period, Netflix's paid worldwide subscribers jumped to 182.9 million, up 22.8% year over year.

Also, AT&T should maintain its investments in high-speed networks such as 5G and fiber to compete against the two other U.S. telecom giants (Verizon and T-Mobile). And these assets will also allow cross-selling opportunities, as HBO Max video streaming could be consumed on 5G devices. Thus, AT&T should still provide nationwide 5G coverage by this summer -- slightly after the launch of HBO Max on May 27.

Given growth investments remain a priority despite the expected decrease in the company's revenue, management indicated the dividend payout would increase to "the 60s", which suggests full-year free cash flow would land in the range of approximately $23 billion to $25 billion, down from the forecast free cash flow of $28 billion before the crisis.

Depending on the coronavirus situation, AT&T's full-year free cash flow could vary by a wider margin, which could impair the company's goal to lower its debt load.

As an illustration, management's three-year plan announced last year forecast the net debt-to-EBITDA ratio to decrease to a range of 2.0 to 2.25 by 2022. However, that ratio increased to 2.63 at the end of the first quarter, up from 2.55 three months before since net debt increased to $154.3 billion, up from $151.0 billion at the end of 2019.  

AT&T next year

Considering its significant debt load and reduced free cash flow, AT&T has become a riskier investment. But in one year, the company will have launched HBO Max and deployed its 5G network across the U.S. 

And given the reasonable payout in the context of coronavirus-related reduced free cash flow, AT&T could raise its dividend for the 37th consecutive year in December. But shareholders should expect a minimal dividend increase, at best. And that will still depend on the evolution of the coronavirus pandemic and the success of growth initiatives such as HBO Max and 5G.

Herve Blandin has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$18.43 (0.05%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
394%
 
S&P 500 Returns
127%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.