AT&T (NYSE: T) is, in our opinion, one of the most undervalued large capitalization companies. Despite the company’s history of struggling to provide substantial shareholder rewards, investors continue to view the company as a source of enormous opportunity. However, the company continues to make the news as it tries to sell assets for fire-sale prices.
AT&T and Investor Perception
AT&T’s share price has continued to suffer from a fundamental perception that it’s a company in a difficult position. The company does have a substantial debt load from acquisitions of DirecTV and TimeWarner, in fact it has more debt than any other company in the United States. However, despite this, the company’s cash flow is more than enough to cover this debt.
Due to investor perception though, the company has felt the strong urge to consistently reduce its debt. As a result, the company has consistently looked into selling assets to improve its debt load. The company has proposed selling all sorts of assets, most recently its massive DirecTV acquisition, at less than 25% of its purchase price.
This investor presentation has continued to plague the company and it’s something worth paying close attention to.
AT&T’s True Business Priorities
However, AT&T continues to focus on its true business priorities and to support its long-term growth.
AT&T True Business Priorities – AT&T Investor Presentation
AT&T is continuing to focus on its key businesses, specifically 5G wireless and fiber-based connectivity. Fiber-based connectivity, or the company’s home internet service, is an aspect of the company’s cash flow that we’re particularly excited about long-term. We can see the company growing its fiber business for its long-term potential.
Additionally, the company is focused on being effective and efficient, finding new efficiencies for a post-pandemic environment. As a part of this, the company is investing in new strategic growth areas, and its committed to supporting its dividend and reducing debt. The company continues to pay a responsible dividend of more than 7.5%, and is focused on debt reduction.
The company is continuing to review its portfolio, something we view as a downside, as the company is continuing to monetize non-core assets.
AT&T 3Q 2020 Results
At the same time, the company’s recent earnings and its overall budget have continued to perform significantly above expectations.
AT&T Results – AT&T Investor Presentation
AT&T has continued to perform across its entire portfolio of businesses. The company’s cellular division has continued to grow and the company’s fiber and broadband businesses have continued to grow. These changes should support nearly $1 billion in additional annual revenue for the company, and support new cash flow.
It highlights the company’s slow and steady growth for shareholders. The company’s HBO and HBO Max domestic subscribers have significantly outperformed forecasts. Financially, the company has significant pushed back maturities and continued FCF. The company has changed its new dividend payout targets to a payout ratio in the high 50s%.
That means that in one of the most difficult years in the company’s history, the company is actually coming in above its targets.
AT&T A Cash Flow Giant
Overall, long-term, AT&T is focused on becoming a cash flow giant and driving long-term shareholder rewards.
AT&T Cash Flow Positioning – AT&T Investor Presentation
AT&T has managed to decrease its net debt by $31 billion over the past approximately 2 years. That has taken the company’s net debt to adjusted EBITDA from 3.0x to 2.66x, although this is closer to less than 2.5x when we skip past the impact of COVID-19. We expect that to be a temporary impact lasting more than 1-2 years.
The company has significant debt towers from 2020-2025, however, it’s improved those significantly. As a result, from 2020-2025, the company’s annualized debt due over the next 6 years is almost $6 billion. That’s more than affordable for the company, and while it could reduce it, it can keep paying that down long-term.
Another way of looking at it is if the company decides to paydown all its debt over 30-years, it would need to paydown $5 billion / year. The company currently has $25 billion / year in FCF, down from $30 billion / year prior to COVID-19. The company’s annual dividend is $15 billion, meaning post dividends, the company will have $5 billion in leftover FCF.
That’ll be $10 billion in a good year. The company’s weighted average maturity is 17 years @ 4.1%, showing that banks believe the company is heavily undervalued. The company is continuing to chase asset sales, which we don’t think are required, and overall has an impressive portfolio.
AT&T Our Vision
Our vision for AT&T involves the potential for significant long-term shareholder rewards. The company has $150 billion at debt. The company can choose to pay this down long-term at $5 billion annually, providing $200 million in annual FCF improvements. The company will earn $25 billion in FCF in a bad year, post capital spending, or $30 billion in a good year.
Past this, the company will continue paying $15 billion in annualized dividends increasing at several hundred million $ annualized. Most of that will be covered by the company’s saved FCF from debt paydowns. The company can increase EV by 2.5% annualized, with debt paydown, with 7.5% annualized dividends, pointing towards double-digit annualized returns.
That’ll come along with $5-10 billion in leftover annual cash flow the company can use for a variety of things.
AT&T’s risk is of course the chance of long-term uncertainty which would come from a prolonged market downturn. So far, the company has showed an ability to outperform into 2020, however, there’s no guarantee for investors that continues, and in fact, there’s a substantial chance that it doesn’t. We are well overdue for a downturn.
However, even with that said, AT&T has significant leeway in its business and it’s a valuable long-term investment.
AT&T is focused on long-term growth and rewards for shareholders, and the company is paying close attention to that fact. The company has a substantial dividend yield that it’s expected to steadily grow, it’s continuing to invest in all facets of its business, and its continuing to manage its debt load. That makes the company able to generate long-term value.
The company continues to face pressure from investors to sell of assets, and seems to be attempting to do so at bottom of the barrel prices. We feel that this is a bad move, the company should keep control of its current empire and cash flow, and focus on rewarding shareholders, as it originally intended to do last year.
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Disclosure: I am/we are long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.