AT&T (T +1.21%) stunned investors last month with two announcements. First, it plans to spin off WarnerMedia and merge it with Discovery (DISCA +0.00%) (DISCK +0.00%), ending its costly attempt to become a media powerhouse following its acquisition of Time Warner in 2018.
Second, it announced it would reduce its dividend after the spinoff, ending its 36-year streak of annual dividend hikes and exiting the elite group of Dividend Aristocrats. AT&T claims the cut reflects its divestment of WarnerMedia, and the reduction will be offset by newly issued shares of the spinoff.
Image source: Getty Images.
But there was also a lack of clarity regarding AT&T's plans to expand as a stand-alone company, especially after T-Mobile (TMUS +1.41%) merged with Sprint last year and surpassed AT&T as America's second-largest wireless carrier. AT&T's 5G network also still offers less coverage than T-Mobile's network.
AT&T's CFO Pascal Desroches recently tried to clear the air at a Credit Suisse communications conference. Let's review the 10 key things he wants investors to know.
1. Its wireless business is still strong
Desroches claims AT&T's mobility business successfully reversed its previous losses by focusing on "higher-value" customers. In other words, he expects AT&T's postpaid customers, which generate more revenue than its prepaid customers, to continue rising after suffering a slowdown in 2019.
|
Metric |
FY 2018 |
FY 2019 |
FY 2020 |
|---|---|---|---|
|
Postpaid subscribers |
77 million |
75 million |
77 million |
|
Prepaid subscribers |
17 million |
18 million |
18 million |
Data source: AT&T.
2. It is expanding its 5G network
T-Mobile's 5G network offers about 33% more geographic coverage than AT&T and Verizon Communications' (VZ +1.43%) combined 5G networks in the U.S. That's because T-Mobile's 5G network mainly uses the midband 2.5 GHz spectrum, which travels farther and penetrates buildings more easily than the C-band spectrum AT&T and Verizon use.
Desroches claims AT&T will accelerate the deployment of its C-band spectrum and cover "200 million people by the end of 2023." However, T-Mobile's extended-range 5G already reaches about 295 million people today -- so AT&T won't overtake T-Mobile anytime soon.
3. It is doubling its fiber footprint
Desroches declared AT&T will "double the size" of its "fiber footprint to about 30 million customer locations by year-end 2025."
That expansion could strengthen AT&T's broadband and business wireline businesses, which generated 22% of its revenue last year. That percentage should rise after AT&T spins off WarnerMedia.
4. Capital investments are rising
As a stand-alone company, Desroches expects AT&T to boost its capital investment to about $24 billion annually -- with most of that spending allocated toward the expansion of its 5G and fiber networks.
5. WarnerMedia is recovering
Desroches expects WarnerMedia's second-quarter results to benefit from an easy year-over-year comparison to the pandemic's impact a year ago.
In the second half, he expects WarnerMedia to benefit from higher ad sales, theater reopenings, and the continued growth of HBO Max -- which could serve 67 million to 70 million subscribers by the end of the year. That still puts HBO Max far behind Netflix and Walt Disney in the streaming race, but the merger with Discovery might bring more content and subscribers to its streaming services.
6. Reiterating its long-term guidance
Desroches reiterated AT&T's prior guidance for 2022 to 2024, which reflects the spinoff of WarnerMedia and its higher capital expenditure targets. It expects to generate over $20 billion in annual free cash flow after the deal closes, and maintain a cash dividend payout ratio between 40% and 43%.
In other words, the "new" AT&T will pay out about $8 billion in annual dividends, compared to nearly $15 billion in dividend payments in 2020, so investors should expect its current dividend to be nearly halved.
7. It won't cut the dividend until the deal closes
On the bright side, AT&T doesn't expect to "reset" its current dividend until after the spinoff and merger close. AT&T expects to close the deal in mid-2022, but the actual deadline is July 15, 2023. Therefore, investors can still collect its 7% yield for at least one more year.
8. Its yield is still "very attractive"
Desroches claims the "resized" dividend will continue to deliver a "very attractive yield in the 95th percentile" of all dividend stocks. That isn't surprising, since AT&T's current yield can be cut in half and still remain higher than the yields of many other mature blue chip stocks.
9. It will have less debt
Desroches expects AT&T's net debt-to-adjusted EBITDA ratio to drop from 3.1 times last quarter to 2.6 times after the spinoff closes. It expects that ratio to drop below 2.5 times by the end of 2023.
10. It may resume buybacks
If AT&T's net debt-to-adjusted EBITDA ratio drops below 2.5 times, the company will have the option to resume its buybacks -- which have been mostly suspended since last year.
Not much has changed
Desroches didn't offer any compelling reasons to buy AT&T -- he mainly reiterated the bullet points from last month. The stock certainly looks cheap, but it will likely keep trading at a discount until more catalysts appear.
