AT&T (T -1.56%) appears on the radar of many investors because of its attractive dividend, which currently yields a lofty 7%. Its long history also provides a measure of security for shareholders. And wireless access today is a nearly indispensable service.
The telecom giant consistently produces billions of dollars in revenue and free cash flow, but it's also burdened by challenges. Here's what you need to know before deciding to invest in AT&T.
Coronavirus creates new company woes
AT&T's fortunes have suffered of late. It spent billions building a media empire through the purchases of DIRECTV and then Time Warner (now called WarnerMedia) -- amassing significant debt in the process. It was weighted down with more than $160 billion in debt at the end of 2020's first quarter. It added another $5.5 billion loan to its debt burden in April to give itself financial flexibility in the face of the COVID-19 pandemic.
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The pandemic threw a massive monkey wrench into the company's plans for paying down debt and growing its business. When it reported fourth-quarter 2019 results at the end of January, AT&T was in a different position. WarnerMedia represented 18% of total operating revenue, and AT&T anticipated free cash flow of around $28 billion in 2020 after delivering record free cash flow of $29 billion in 2019.
The pandemic caused movie theater closures and a pullback in advertising, both of which impacted WarnerMedia revenue. The division ended the first quarter with $7.4 billion in revenue, down from the previous year's $8.4 billion.
More challenges AT&T needs to address
The economic impact of the pandemic has compounded the widely publicized decline of AT&T's DIRECTV business. Subscribers are dumping the service as the old cable television paradigm dies away in the face of a consumer shift toward streaming media. The service, along with over-the-top video offerings, lost more than 1 million subscribers in Q1 after dropping over 4 million total in 2019.
AT&T launched different streaming services to stem the bleeding. One, dubbed AT&T TV, debuted in March and pushed live TV and sports as its chief draw just as the pandemic forced the cancellation of live events. The company then rolled out HBO Max on May 27. Investors will have to wait for second-quarter results to see if these efforts have begun to bear fruit.
Along with these woes, AT&T had to come to an agreement with activist investor Elliott Management. The hedge fund demanded the company stop making acquisitions and focus on the core telecom business and debt reduction, as well as make management changes.
CEO Randall Stephenson plans to step down on July 1. In mid-June, reports surfaced indicating AT&T was looking to sell WarnerMedia's gaming division as part of an effort to reduce debt. Another recent report concerning its debt-reduction efforts suggests the company will eliminate 4,700 jobs and close 250 of its stores.
The bottom line
Despite its challenges, as a telecom stock, AT&T offers a compelling investment thesis. At some point, the pandemic and its impact will pass, allowing AT&T's WarnerMedia division to bounce back. The company's core wireless business continues to do well -- its service revenue increased 2.5% year over year in the first quarter due to customers increasingly shifting to more expensive unlimited data plans.
Its wireless network is poised to deliver nationwide 5G coverage later this summer. Because 5G technology offers a faster, more responsive network, consumers using it can stream content and perform other online activities from mobile devices more effectively than is possible today. It's one of the reasons AT&T is bundling its HBO Max streaming service with 5G access.
In the short term, AT&T is in a tough position, with WarnerMedia revenue falling and the entire company weighed down by debt obligations amid a pandemic-induced recession. For the patient investor, however, AT&T stock still offers a long-term opportunity.
