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Better Buy: AT&T vs. Disney

By Robert Izquierdo - Sep 2, 2020 at 8:15AM

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Both companies are experiencing revenue declines. Despite the tough times, which is still the better investment?

Telecom titan AT&T (T 0.17%) and entertainment icon Walt Disney (DIS 4.68%) share more similarities than their respective industries might suggest. Both are storied brands experiencing revenue declines from the coronavirus pandemic's impact.

Both also look to new streaming video services as a key component to future success. Which company will overcome current challenges to prove the better investment?

A couple on their couch watch television with a tin of popcorn in their lap.

Image source: Getty Images.

AT&T's outlook

On the surface, AT&T seems like the sure winner of this comparison. Its wireless business continues to deliver dependable revenue, bringing in $17.1 billion in the second quarter compared to $17.3 billion last year.

This allowed the company to enjoy strong free cash flow totaling $7.6 billion in Q2, nearly double its first quarter's $3.9 billion, enabling AT&T to fund its high-yield dividend. Disney, by contrast, was forced to suspend its dividend due to the pandemic's economic impact.

Still, AT&T was not left unscathed by the pandemic. Its WarnerMedia division, which provides television and theatrical entertainment, experienced a 23% year-over-year drop in the second quarter.

Pandemic-induced sporting event cancellations and theater closures decimated TV advertising and theatrical revenues. WarnerMedia's losses contributed to the company's Q2 revenue decline to $41 billion from last year's $45 billion.

WarnerMedia's bright spot is its recently launched streaming service, HBO Max. Consumers sheltering at home from the pandemic have rapidly embraced streaming media, creating an opportunity for HBO Max to deliver several benefits to AT&T. HBO Max touted 36 million subscribers at the end of Q2, about a month after its rollout.

Disney's opportunities

Disney's fiscal third quarter (which ended June 27) saw revenue plunge 42% from the prior year. Its travel and tourism-dependent business lines, such as theme parks and cruise ships, as well as its retail stores were the most affected, witnessing a staggering 85% revenue drop compared to last year when this division contributed a third of total revenue.

The company looks to its Disney+ streaming service for growth opportunities. It already exceeded 60 million subscribers as of early August after debuting last November.

While still a far cry from rival Netflix's 192.9 million subscribers, the service is, according to CEO Bob Chapek, "far exceeding our initial projections." Combined with the company's other streaming services, ESPN+ and Hulu, total subscribers topped 100 million.

The Disney+ service is also an opportunity to recoup Disney's theatrical revenue, which was adversely impacted in Q3 by theater closures, causing a 55% year-over-year drop. Since theaters remain closed in many countries, Disney is taking a creative approach to its film slate.

It's releasing tentpole movie Mulan to Disney+ subscribers for an access fee of $29.99 on top of the regular $6.99 monthly subscription cost. Success with this approach could provide a new distribution channel for Disney's film content if it is successful.

The final verdict

AT&T's resilient telecom business and dividend make it an attractive alternative to Disney's challenging business environment. Income investors will want to opt for AT&T over Disney.

Others see Disney's current dilemma as an opportunity. Under normal circumstances, Disney's revenue plunge would have sent investors running for the hills. Instead, the stock price has steadily risen since March's pandemic-induced market-wide drop. Investors are taking the long-term view, knowing that Disney's revenue will eventually recover.

If I had to choose one, my pick would be Disney. AT&T's post-pandemic world means its WarnerMedia division will bounce back, but other challenges remain. The U.S. telecom industry is saturated, meaning AT&T can only grow this part of the business by taking customers from its rivals or raising prices for its existing clientele.

Battling competitors puts pressure on margins as AT&T must cut wireless prices to attract subscribers. That's where it's unknown whether HBO Max acts as enough of a carrot to pull in customers while maintaining AT&T's wireless price points.

Post-pandemic, Disney is positioned for a revenue growth trajectory, particularly given its successful Disney+ service. Disney+ alone can propel many new opportunities given Disney's strong family-friendly content library and popular brands such as Pixar, Marvel, and Star Wars. These factors make Disney a better long-term investment choice.

Robert Izquierdo owns shares of AT&T and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
$18.04 (0.17%) $0.03
The Walt Disney Company Stock Quote
The Walt Disney Company
$117.69 (4.68%) $5.26

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