AT&T (T 1.02%) was once considered a solid stock for conservative income investors. Yet over the past five years, the telecom giant's stock lost nearly half its market value as the company made a series of debt-fueled acquisitions -- including DirecTV and Time Warner -- and struggled to expand its wireless business.
However, AT&T has also taken several big steps toward rebooting its business and reducing its leverage over the past year. It spun off DirecTV, sold other noncore assets, and agreed to spin off and merge WarnerMedia with Discovery (DISCA) (DISCK).
Image source: AT&T.
AT&T claims that as a slimmed-down company, it will focus on expanding its 5G and broadband networks to keep pace with Verizon and T-Mobile in the telecom market. It also believes that its new media spin-off, Warner Bros. Discovery, should fare better as a stand-alone company that isn't shackled to an aging telecom company.
The market doesn't seem impressed by AT&T's plans so far, but the company recently provided a clearer update during its analyst and investor day on March 11. Let's review the key points to see if the company can finally generate positive returns over the next 12 months.
Spinning off WarnerMedia and cutting its dividend
Discovery's shareholders formally approved its merger with WarnerMedia on the same day as AT&T's investor presentation. That clears the way for Warner Bros. Discovery to be fully spun off in April.
When the deal closes, AT&T's investors will receive a 0.24 share of Warner Bros. Discovery for each share of AT&T they own. AT&T will also reduce its annual dividend from $2.08 to $1.11 per share, which cuts its forward yield from 9% to 4.8%, to reflect that divestment.
Clearer guidance for 2022 and 2023
AT&T reiterated its guidance for 2022. On a pro forma basis, which excludes its divestments and spin-offs, it expects its revenue to rise by the low single digits. It expects its wireless service revenue to increase by more than 3%, and for its broadband revenue to grow by at least 6%.
It expects its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow 2% to 4%, even as it faces a $600 million headwind from the shutdown of older 3G networks and the lack of fresh government credits (from the second phase of the Connect America Fund) in the first half of the year. It expects its adjusted earnings per share (EPS), which will be affected by a higher tax rate, to grow 0% to 2%.
AT&T also initiated its 2023 guidance. It expects its revenue to grow by the low single digits again, with low single-digit growth in its wireless service business and mid- to high-single-digit percentage growth for its broadband business.
It expects its adjusted EBITDA to rise 5% to 7% as it benefits from $1.5 billion in cost transformation savings, and for its adjusted EPS to grow roughly 2% to 7%. Those stable growth rates should make it more comparable to Verizon, which easily outperformed AT&T over the past five years by steering clear of massive pay-TV and media acquisitions.
AT&T also plans to boost its capital investment from $20.1 billion in 2021 (on a pro forma basis) to about $24 billion in both 2022 and 2023. It will allocate about $5 billion each year to the expansion of its 5G networks.
AT&T expects its pro forma free cash flow to dip from $19.2 billion in 2021 to $16 billion in 2022 as it ramps up those investments, but to rise to about $20 billion in 2023 as its growth stabilizes. It intends to easily cover its dividend payments in 2023 with a healthy cash dividend payout ratio of 40%.
As for its leverage, AT&T expects its net debt-to-adjusted EBITDA ratio to drop from 3.1 at the beginning of 2021 to 2.5 by the end of 2023.
AT&T's stock should stabilize and rise in a year
Based on AT&T's goals and its current price of $23, its stock trades at just nine times its 2022 earnings. Verizon, which is expected to generate less than 2% earnings growth this year, trades at 10 times that estimate.
That low valuation should limit AT&T's downside potential, and there's no real reason to sell the stock before it spins off Warner Bros. Discovery -- which will essentially be paid out as a special dividend for its existing investors. After that divestment, investors will likely consider AT&T to be a safe haven stock again as inflation, rising interest rates, and other macro headwinds feed the ongoing rotation toward stable value stocks with high dividends.
Simply put, I believe AT&T will finally stabilize and rise again this year. Until then, investors should simply relax and keep reinvesting its hefty dividends.
