Solid and Stable Income for this Telecom Giant…

AT&T Inc. is the largest telecom player in the world, by revenue and provides the fastest wireless network in the U.S. It is a leading U.S. based communications and digital entertainment service provider, offering mobile, broadband, subscription TV services, and live TV offerings.

AT&T’s business units are Communications (78% of 2019 revenues – wireless, wireline, and entertainment in the US and businesses globally), WarnerMedia (17%), Latin America (4%- entertainment and wireless services outside of the U.S.), and Xandr (1%). About 90% of AT&T’s revenues are derived from services while equipment constitutes the remaining 10%. The company has a presence in more than 200 countries and has more than 370 million direct-to-consumer relationships, including viewers on its digital properties.

AT&T perfectly fits into the definition of a “modern media company” offering premium content, direct to customer relationship, advertising, and high-speed networks to its customers, including companies, government, and wholesale and individual subscribers.

Investment Data

Revenue Growth & Market Exposure

With nearly four decades of its existence, AT&T has built a strong brand reputation and a loyal customer base. The company is known for its seamless service, uninterrupted internet, and efficient network operations. Huge entry barriers in the form of extensive infrastructure and costly spectrum auctions form a wide moat around AT&T’s business. The company’s ability to deliver great content over high-speed networks has enabled deeper customer engagement. Through AT&T Communications, the company provides mobile, broadband, video, and other communications services to consumers and companies in the U.S. As the best wireless solution provider in the U.S., AT&T is favorably placed to benefit from the rapid growth in the wireless industry. The company’s customer base consists of 193 million wireless subscribers in North America (with more than 20 million in Mexico). It’s Latin America business provides pay-TV services across 11 countries and territories in Latin America and the Caribbean. 

In order to improve customer experience, AT&T provides live TV offerings to a wide range of streaming services such as DIRECTV NOW, Watch TV, and HBO NOW. The company will launch an SVOD service, offering WarnerMedia’s rich collection of films, television series, documentaries, etc. AT&T’s 5G deployment continued with more than 50 million customers currently, and it is estimating nationwide coverage by this summer. Its fiber network reaches more than 14 million household locations currently and it witnessed an uptick in demand for both Fiber and broadband in the quarter. AT&T also achieved the 2019 merger synergies at WarnerMedia. The company continues to drive ARPU growth in both video and IP broadband and is seeing higher demand for VPN bandwidth and security. AT&T’s HBO Max is estimated to be launched by May end and it is expecting strong demand. The company is also focusing on re-aligning its efforts consistent with the rapid changes in consumer behavior as a result of the pandemic. 

The COVID-19 outbreak has had a massive effect on businesses and human lives so far. The pandemic has impacted AT&T’s Q1 results to the tune of $0.05 per share. Its media business suffered as a result of production studios and theater shutdown and lower advertising revenues with the postponement/ cancellation of several sporting events. The company is also bereft of roaming revenues as well as a reduction in late fees. The first quarter impact of these items was ~$50 million and equipment revenues also declined by ~25% YoY in March. Wireline revenue losses from small businesses could also lead to a decline of 15% in overall revenues.

However, AT&T is also seeing the benefits of unprecedented volumes of voice calls, text, video streaming, during this time. The company is witnessing an uptick in its core subscription-based businesses, wireless, broadband, and enterprise networks currently, which represents more than 60% of its revenues and more than 70% of EBITDA. Its FirstNet (75% built) network is well-positioned to provide critical connectivity to healthcare providers, governments, military, police, fire, and EMS during this time. AT&T has adopted flexible payment options, waived late fees, and overages, and lifted data caps to ease some financial pressure off its customers at a time of economic stress. AT&T has withdrawn its prior financial guidance as a result of the COVID outbreak. It was expecting revenue growth of 1%-2% CAGR every year through 2022.

Dividends

AT&T Inc. is the only S&P500 Dividend Aristocrat in the telecom sector. The telecom giant has not only been paying dividends for over the last three decades but is also increasing them for the past 36 consecutive years. AT&T has an impressive dividend yield of 7% but a high dividend payout ratio currently. It last raised its dividend by 1.9% and has achieved a dividend growth of 2.3% CAGR over the last ten years. Its EPS has grown at a rate of 6.3% CAGR in the last three years. AT&T has temporarily suspended its share repurchase program currently. It delivered a total shareholder return of 45% in 2019. 

The company paid 50% of its free cash flow as dividend in the last year and is estimating its payout ratio to be in the ’60s range comfortably in 2020, even in the current economic crisis. AT&T’s core subscription-based businesses, wireless, and broadband have proven to be resilient in the current crisis and are providing a recurring stream of revenue and solid cash flows to the company. The company is thus able to combat the headwinds faced in other lines of business. AT&T has enough liquidity to continue investing and paying its debt and dividends. It is expecting its cash balance to comfortably cover its debt maturities through 2023. The company has reduced its net debt by about $30 billion since the Time Warner transaction and will continue to pay down its debt. 

Growth in wireless, broadband and WarnerMedia’s premium content should support AT&T’s future dividend payouts. Given a huge portfolio of services, AT&T is in a good position to serve its customers’ appetite for growing video viewing with its broad spectrum of video entertainment services ranging from mobile-centric and live TV streaming packages, to traditional linear video and soon to be launched SVOD service. The company continues to invest significant capital in expanding its network capacity and securing spectrum to meet its long-term needs. AT&T’s acquisition of DirecTV and Time Warner has benefited the company by allowing it to pool more services into existing customer packages. 

The company is well-positioned to face the COVID crisis with its strong cash position and balance sheet, solid cash-generating core businesses, and cost initiatives. It is expecting to deliver $6 billion in cost savings over the next three years. 

Competition

AT&T biggest competition is Verizon Communications Inc., a leading diversified communications services in the U.S. The company faces intense competitive pressure in the wireless and video services. In its legacy voice and data business, AT&T competes with wireless, cable, and VoIP providers who are capable of providing comparable services at lower prices. In addition, it also competes with media and entertainment companies for digital entertainment services.

Bottom Line

AT&T is anticipating an increase in bad debt expenses across the various businesses as a result of COVID. The areas most affected will be Warner Bros, and video and consumer legacy service revenues. The company is expecting these impacts will be short-term in nature and is estimating growth to come from continued investments in areas like 5G, broadband, and HBO Max. The launch of Scoob! direct-to-home for viewing and exclusive streaming premiere on HBO Max shall cater to higher levels of consumer satisfaction. Prior to the lockdown, the company was expecting revenues, adjusted EBITDA, and EPS to grow every year on the back of its three-year plan.