AT&T (T +0.73%) has been criticized for its acquisitions and related debt accumulation in recent years. The telecom giant's detractors have a point. High debt is a challenging position for any company, particularly now due to the COVID-19 pandemic.
Even so, AT&T's business possesses many compelling qualities. The stock hovers around $30 per share at the time of this writing, well below its 52-week high of $39.70. So does it make sense to buy shares? Let's examine the company's pros and cons to shed light on whether it is a worthwhile investment.
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The downsides
AT&T accumulated substantial debt from costly acquisitions unrelated to its core wireless business. It spent $49 billion in 2015 for DIRECTV and another $85 billion for Time Warner in 2018. After the Time Warner acquisition, AT&T was left with net debt of $180.4 billion, and the company has worked to pay it down since.
DIRECTV has been shedding subscribers as the cord-cutting trend accelerates. The service, along with other television offerings in AT&T's communications division, lost over 4 million subscribers in 2019, and another 1 million in the first quarter of this year.
AT&T has struggled to find a solution to the subscriber losses, rolling out a streaming service called DIRECTV Now that became AT&T TV Now. In March, the company added its new AT&T TV service, which wraps cable TV's multiple package options into cord-cutting features. A key selling point was the inclusion of live programming, such as sporting events, but the coronavirus pandemic caused the cancellation of all events.
The pandemic also meant AT&T's other acquisition, Time Warner (now called WarnerMedia), was adversely affected as well. With theaters closed, its theatrical films had to be put on hold. WarnerMedia's television programming suffered the loss of advertising revenue from the cancellation of live sporting events. These impacts contributed to a 12.2% year-over-year decline in first-quarter revenue for the division, dropping a billion dollars from 2019's $8.4 billion to $7.4 billion.
The strengths
Despite the challenges, AT&T's core wireless business remains resilient. Even with the pandemic, the wireless segment's first-quarter revenue increased 0.2% year over year, a significant win given how badly the pandemic affected its WarnerMedia segment.
The driver of this growth is also significant: an increase in both postpaid phone subscribers and average revenue per user (ARPU) as subscribers upgraded to unlimited plans. Postpaid phone subscribers are coveted over prepaid customers since they represent recurring monthly revenue and lower churn rates.
AT&T has enjoyed growth in its wireless service revenue every quarter for the past year. Its first-quarter wireless service revenue of $14 billion was a 2.5% year-over-year increase, and represents a third of the company's $42.8 billion in total revenue.
Another strength is AT&T's expanding 5G wireless network. The company anticipates 5G coverage nationwide by the summer. Customers who want to access the 5G network will require device upgrades (bringing new revenue to the company) since many of today's devices don't support 5G.
It also ended the first quarter with approximately $10 billion in cash and free cash flow of $3.9 billion. AT&T stated it expects to continue meeting its debt obligations despite the pandemic's impact on revenue.
Moreover, AT&T's WarnerMedia segment introduces a new streaming service for its HBO television network, called HBO Max, on May 27. HBO brought in revenue of $1.5 billion in the first quarter. Once the broader economy recovers, WarnerMedia can recoup its lost advertising and theatrical revenue. In 2019, WarnerMedia accounted for 18% of the company's operating revenue, so its recovery will provide a significant lift to AT&T's income.
The final verdict
AT&T's debt load will take years to whittle down, but the company is committed to doing so. It already has reduced net debt by $30 billion between the Time Warner acquisition and the end of 2019. The company is also committed to its dividend, which sports an attractive yield of 6.98%.
AT&T experienced setbacks due to the coronavirus pandemic. Yet it's in a position to bounce back thanks to its cash position and its solid wireless business. WarnerMedia's revenue will rebound post-pandemic. The positives outweigh the company's challenges, making AT&T stock a buy.
