Back in 2015, AT&T (T 2.31%) closed its $49 billion purchase of DirecTV to become the country's largest pay-TV provider. At the time, AT&T believed that acquisition would strengthen its business with a four-way bundle of its mobile, fixed-line, internet, and pay-TV services.
But over the following years, DirecTV struggled to keep pace with over-the-top streaming services like Netflix. AT&T bought Time Warner for $85 billion in 2018 to build its own streaming services, but that expansion was chaotic, costly, and offset the relatively stable growth of its telecom business. It also exacerbated that mess by buying smaller digital media companies.
AT&T's desperate media expansion caused its total debt to more than double from $82.1 billion in 2014 to $177.4 billion in 2021. But during those seven years, its annual operating revenue only grew at a compound annual growth rate (CAGR) of 3.5% to $168.9 billion.
Investors weren't impressed. As a result, a $10,000 investment in AT&T on the first trading day of 2015 would be worth just under $10,000 today after including its recent spin off of Warner Bros. Discovery (WBD 3.16%). Even after factoring in reinvested dividends, it only generated a total return of about 60%. The S&P 500 more than doubled during those seven years.
Can AT&T regain its reputation as a stable dividend stock for conservative investors? Let's review its recent changes to find out.
Trying to erase the past seven years
AT&T's ill-fated media expansion was orchestrated by Randall Stephenson, who served as the company's CEO from 2007 to 2020. Stephenson's successor, John Stankey, quickly took steps to reverse those mistakes.
Under Stankey, AT&T focused on divesting its non-core assets, reducing its debt, and focusing on network upgrades for its core telecom business. That strategic shift led to the divestments of its Latin American satellite unit Vrio, its mobile gaming publisher Playdemic, its tabloid media site TMZ, its anime platform Crunchyroll, and other smaller businesses. In addition, it sold some of its real estate and leased back the properties to save cash.
AT&T spun off DirecTV last year and agreed to merge WarnerMedia (Time Warner's assets) with Discovery to create a new company. That massive spin-merger created Warner Bros. Discovery, and AT&T shareholders recently received a new 0.24 share of WBD for each share of AT&T they owned.
But will the "new" AT&T impress investors?
As AT&T recklessly expanded its media business, it fell behind Verizon (VZ 0.52%) and T-Mobile (TMUS -0.45%) in the U.S. wireless market.
Verizon remains the market leader in terms of prepaid and postpaid customers, but T-Mobile overtook AT&T as the second-largest wireless carrier by those measures after it merged with Sprint in 2020. T-Mobile also uses a mid-band spectrum for its 5G networks, which gives it wider coverage areas than the high-band spectrums favored by AT&T and Verizon.
As a streamlined telecom company, AT&T plans to increase its annual capital investments (on a pro forma basis) from $20.1 billion in 2021 to approximately $24 billion in both 2022 and 2023, with most of that cash being deployed on upgrades for its broadband and wireless networks.
To conserve even more cash, AT&T reduced its annual dividend from $2.08 to $1.11, which ends its run as a Dividend Aristocrat of the S&P 500 but still equals a very high forward yield of 5.7%. Verizon only pays a forward yield of 4.7%, while T-Mobile doesn't pay a dividend at all. AT&T plans to spend about 40% of its free cash flow (FCF) each year to fund those payments.
AT&T expects its revenue to grow by the low-single digits in 2022 and 2023, and for its adjusted earnings per share (EPS) to grow 0%-2% in 2022 and 5%-7% in 2023. As its earnings growth stabilizes and it offloads some of its debt to Warner Bros. Discovery, it expects to reduce its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio from a peak of 3.1 in early 2021 to 2.5 by the end of 2023.
A new beginning, but it still has a lot to prove
AT&T's stock looks dirt cheap at eight times forward earnings. Verizon trades at 10 times forward earnings, and T-Mobile has a forward price-to-earnings ratio of nearly 50. However, AT&T's stock is cheap because it's repeatedly burned its investors with bad business decisions over the past seven years.
Its outlook for the next two years seems promising and achievable, but it needs to make progress toward those goals before it can command a higher valuation. AT&T is now in better shape than it was two years ago, but it still has a lot to prove before it can be considered a good long-term investment.