AT&T's (T 0.10%) stock price rose 4% on April 21 after the telecom giant posted its first-quarter earnings report. This marked AT&T's first earnings report after its long-awaited spin-off of Warner Bros. Discovery (WBD 2.10%), which closed on April 8 and finally ended its messy media expansion plans.
AT&T's consolidated revenue fell 13% year over year to $38.1 billion, which missed analysts' estimates by $190 million. That decline reflected its spin-offs and divestments of DirecTV, Vrio, Xandr, and Warner Bros. Discovery (WBD) over the past year. Excluding those impacts, AT&T's stand-alone revenue rose 2.5% to $29.7 billion. Its adjusted earnings declined 9% to $0.77 per share, but it still beat the consensus forecast by eight cents.
Those headline numbers were mixed, but the market's response suggested that investors were warming up to the "new" AT&T again. Could AT&T be a dependable, income-generating value play in this challenging market?
AT&T's wireless business is growing
AT&T's first-quarter numbers included a lot of noise from its recent spin-offs divestments. However, its core wireless business is still growing.
AT&T's wireless revenue rose 5.5% year over year to $20.1 billion as its total number of postpaid phone subscribers grew 4% to 67.5 million. It gained 691,000 postpaid subscribers during the quarter, which represented its highest first-quarter net adds in over a decade. Its postpaid churn of 0.79% rose slightly from 0.76% a year earlier, but it still declined from its postpaid churn of 0.85% in the fourth quarter.
During the conference call, CEO John Stankey attributed its robust growth rates to its "strong network performance, simplified offers, and improving customer experience." Stankey also said AT&T was "confident" that it could "continue this momentum in a disciplined manner."
However, the wireless segment's operating income still fell 3.2% year over year to $5.9 billion. Its expenses rose 9.5% to $14.2 billion as it shut down its 3G network, racked up higher equipment costs, and incurred higher costs related to bundling HBO Max into its wireless plans. AT&T expects to maintain those bundles even though WBD is now a separate company, but WBD will shoulder all the costs of developing new content.
The wireline business is messier
AT&T's wireline business, which is transitioning from older cable and DSL-based connections toward faster fiber networks, turned in less impressive results. Its total broadband connections increased 0.6% year over year to 15.5 million as its number of fiber subscribers rose 21% to 6.3 million.
Those growth rates look stable, but the weakness of its business wireline business -- which it blamed on delayed government orders -- offset the growth of its consumer wireline business.
The consumer wireline segment's revenue rose 2% to $3.2 billion as its operating income grew 3.3% to $317 million. But the business wireline segment's revenue fell 6.7% to $5.6 billion as its operating income tumbled 20.5% to $859 million.
CFO Pascal Desroches predicts the business wireline segment will "rebound later this year" as the U.S. government passes the federal budget, but it will likely remain weaker than the consumer wireline segment.
Maintaining its long-term targets
Prior to spinning off WBD, AT&T predicted that its revenue would rise by the low single-digits (on a pro forma basis) in both 2022 and 2023. It expects the broadband business -- led by the expansion of its fiber networks -- to grow faster than its wireless business in both years.
It plans to increase its capital investments from $20 billion in 2021 to $24 billion in both 2022 and 2023 to expand its 5G and fiber networks. But even as it increases its spending, it still expects its adjusted earnings per share (EPS) to rise 0%-2% in 2022 and 2%-7% in 2023.
AT&T also expects to reduce its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio from 3.1 at the beginning of 2021 to 2.5 by the end of 2023. The removal of DirecTV and WBD from its balance sheet should make it easier to achieve that goal.
AT&T reiterated most of those long-term targets, which could make it more comparable to Verizon (VZ 0.21%), during its conference call. Its forward dividend yield of 5.7% also remains higher than Verizon's 4.7% yield.
Is this the start of a "new era" for AT&T?
Stankey said AT&T's first-quarter report marked the start of a "new era" for the telecom giant. That would certainly be true if it achieves its growth targets for 2022 and 2023, but it still faces intense competition from Verizon and T-Mobile in the telecom market.
AT&T's high yield and low forward P/E ratio of 9 should limit its downside potential, but it probably won't rally until it proves it can achieve its ambitious goals. Investors should stick with AT&T if they already own it, but they should consider buying other dividend stocks before starting a new position in this slow-growth telecom giant.