In the wake of a big spinoff, this telecom giant looks to be leaner and meaner.
To be perfectly honest, few traders are revved up about AT&T (T) – Get AT&T Inc. Report stock, and for good reason.
The company’s stock has been a perennial dog, amid ill-advised acquisitions, broken promises from management and tough competition.
“The only redeeming quality of owning T has been the heady dividend yield,” wrote Real Money Columnist Brad Ginesin recently. “Even so, the stock manages to lose annually close to the equivalent of the dividend payout, so holding the stock seems all for naught.”
But things could be changing for the telecom giant in the wake of a recent investors’ day because “the opportunity appears too compelling at the current price prior to the Discovery (DISCA) – Get Discovery, Inc. Class A Report deal closing,” Ginesin added.
Here’s a glimpse at the terms of the AT&T/Discovery deal.
AT&T is set to split off Warner Bros to Discovery shareholders, which is likely to occur in mid-April. The transaction will give T shareholders 0.24 of a share of the new Warner Bros Discovery (with all current Discovery shares getting wrapped in) for each share of T.
“The value T is getting is extrapolated from the current value of DISCA, 71% of a $62 billion company, so at the current price of around $26 for DISCA, T holders have about $6/share in Warner Bros Discovery value” Ginesin said. “Subtracting that from the T share price of ~$23, the remaining $17 will encompass the new AT&T stock. As part of splitting off Warner Bros, AT&T will transfer over $40 billion in debt to the new Warner Bros Discovery.”
There’s more to the deal.
With T at the equivalent of $17 post-deal, the shares will be among the cheapest in the S&P 500, yet the company provides an indispensable service with a growing business producing strong cash flow.
“The new AT&T will be a $120 billion market cap company, growing revenues at low single digits, earning this year around $2.30/share and $20 billion in expected cash flow in 2023,” Ginesin noted. “The 40% dividend payout ratio will yield over 6%.”
The pro forma shares of T have a P/E of 7 and double-digit free cash flow yield — metrics that provide the stock limited downside and plenty of upside as Wall Street gets comfortable with the more focused, less complex and indebted AT&T. “Management sees potential for stock buybacks after the capex surge peaks in 2023 and net debt declines to $110 billion,” Ginesin said.
Wall Street is taking a wait-and-see stance before the deal closes to decipher how AT&T and Warner Bros Discovery will trade post-deal, possibly missing the opportunity to own DISCA at a reasonable valuation and T at a bargain-basement price.
“At AT&T’s investor day, management laid out a credible plan of organic growth and cost-cutting that will help support assumptions for solid earnings and free cash flow,” Ginesin added. “Any appreciation by Wall Street for AT&T’s consistent and growing cash flow will result in a much higher stock price.”
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