AT&T (T 0.41%) and Cisco (CSCO 1.14%) are generally regarded as conservative income investments rather than high-growth plays. AT&T still pays a forward dividend yield of 5.4% following its spin-off of Warner Bros. Discovery (WBD 0.33%), and Cisco pays a forward yield of 3.5%.
Should investors buy either of these blue chip tech stocks as defensive plays against inflation, rising interest rates, and other macro headwinds? Let's reevaluate their growth rates, challenges, and valuations to find out.
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Will the "new" AT&T fare better than the original?
AT&T has generated dismal returns since 2015 for one simple reason: It neglected its core wireless business while aggressively grownig its pay TV and media businesses with debt-fueled acquisitions. That expansion added DirecTV, Time Warner, and other smaller companies to AT&T's ecosystem. But in spite of all that, AT&T continued to lose pay-TV subscribers to Netflix and other streaming video platforms. In response, the telecommunications giant attempted to expand its own streaming video services, but those efforts were expensive and confusing for consumers, and wound up cannibalizing At&T's legacy pay-TV offerings. As AT&T tried to fix its messy media business, it fell further behind competitors Verizon and T-Mobile in the 5G market.
NYSE: T
Key Data Points
But last year, AT&T spun off DirecTV and started to divest its smaller media assets and real estate holdings. Last month, the company did the same with its Time Warner assets and merged them with Discovery to create Warner Bros. Discovery. AT&T claims these divestments will streamline its business, reduce its debt, and enable it to focus on the long-term growth of its core telecom business.
AT&T expects its revenue to rise by the low single digits in 2022 and 2023 and for its adjusted EPS (earnings per share) to increase by 2% in 2022 and by as high as 7% the following year. At the start of 2021, AT&T's net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio was 3.1. Management attributed this to $23 billion made in C-Band spectrum payments, anticipated that this ratio would be "peak leverage level," and forecasted plans to drive the multiple down to 2.5 by the end of 2023. It also aims to generate $20 billion in free cash flow in 2023 and to spend about 40% of that total on its dividends.
AT&T's long-term forecast isn't exciting, but it does show that the company is on its way to becoming a more stable telecom once again. If that strategy pays off, then its stock could be a great buy right, now trading at eight times forward earnings.
Cisco faces more near-term headwinds
Cisco is the world's largest producer of networking switches and routers, but those two markets have been highly commoditized. It's been expanding beyond those legacy products with new wireless devices, cybersecurity services, and applications, but the $49.8 billion in revenue from fiscal year 2021 (ended July 2021) represented only a modest 1% year-over-year increase.
Last September, though, Cisco made some big promises. It declared that its revenue and adjusted EPS would both grow at a CAGR of 5% to 7% between fiscal 2021 and 2025. Management claimed it could achieve that acceleration by growing its higher-growth, higher-margin subscription business and expanding its total addressable market (TAM) with new products and services.
NASDAQ: CSCO
Key Data Points
Unfortunately, Cisco's growth fell short of those targets throughout fiscal 2022 as it grappled with supply chain challenges, new COVID-19 lockdowns in China, and the Russo-Ukrainian war. Cisco insists that the market's demand for its products is still "strong," but it also doesn't know when these headwinds will finally subside.
As a result, Cisco now expects its revenue to rise just 2% to 3% for the full year and for its adjusted EPS to grow 2.5% to 5%. That slowdown isn't disastrous, but it could force it to walk back its ambitious growth targets for fiscal 2025.
On the bright side, Cisco only spent 46% of its free cash flow on dividend payments over the past 12 months, which gives it plenty of room for future hikes. Furthermore, its low forward price-to-earnings ratio of eleven should still limit its downside potential in this challenging market.
The better buy: AT&T
Both of these blue chip stocks are fairly safe plays, but I believe AT&T will remain a better buy than Cisco for three reasons: Its stock is cheaper, its yield is higher, and it faces fewer supply chain and macro headwinds. Cisco's prospects could brighten after this difficult period, but its stock could remain in the penalty box until it readjusts its expectations for 2025.
