AT&T | Fundamental Analysis | Short Setup | MUST READ ! 🔔

AT&T used to be regarded as a well-built blue-chip stock for income-oriented investors. But within the past several years, the telecommunications and media titan has lost about 40% of its market value, and its stock is now near a 12-year low.

AT&T's tumble can be explained by three big missteps. First, it bought DirecTV in 2015 for $49 billion in a failed effort to extend its pay-TV business. Then, it bought Time Warner for $85 billion in 2018 in a desperate struggle to build a streaming media ecosystem. Both deals resulted in the company biting off far more than it could chew, and its long-term debt burden soared.

Finally, AT&T has been so caught up in its media expansion that its wireless segment has been idle. Last year, T-Mobile outdid AT&T as the second-largest wireless carrier in the United States through its merger with Sprint, and its 5G network has more coverage than Verizon and AT&T.

These setbacks have been frustrating, but the stock now trades at just seven times its projected earnings, with a 9.1 percent yield. Should investors think of buying AT&T as an undervalued dividend asset?

Over the past year, AT&T has taken some steps to convert its most critical choices. In May, it stated its intention to separate WarnerMedia (most of Time Warner's media assets) and merge it with Discovery to create an independent company by mid-2022. AT&T's current investors will get stocks in this new company.

In August, AT&T separated DirecTV into a new stand-alone company. AT&T kept 70% of the stock in this new company, and investment firm TPG bought the remaining 30%.

AT&T also sold several smaller companies, including the Latin American satellite division of Vrio, mobile game publisher Playdemic, tabloid news site TMZ, and anime platform Crunchyroll, as well as some real estate to further streamline the business.

The company thinks this approach will free up more resources to expand its 5G network as well as decrease the long-term debt accumulated from deals with DirecTV and Time Warner. The company says its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio will drop from a "peak" of 3.1 in early 2021 to 2.5 or lower by the end of 2023.

After the WarnerMedia separation, AT&T expects its annual revenue to grow at a low single-digit compound annual growth rate (CAGR) from 2022 to 2024, and its adjusted EBITDA and adjusted earnings per share (EPS) to grow at an average single-digit CAGR. In other words, the growth rate of the "new" AT&T may look more stable and analogous to that of Verizon.

AT&T is eventually taking some moves in the correct direction, but it still encounters challenges. WarnerMedia's merger with Discovery will create a larger media business, but the combined company may still struggle to keep up with major players like Netflix and Disney in the competitive streaming market. So the "new" Discovery may not be much better than the old one, which has already lost 14 percent of its value over the past five years.

AT&T will also cut its dividend after it separates WarnerMedia. The company anticipates the "new" AT&T to bring at least $20 billion in free cash flow (FCF) on its own and then pay 40% to 43% of that amount in dividends. Meanwhile, WarnerMedia probably won't pay a dividend at all, as it would make more sense to keep that money for investments in streaming.

When AT&T set this cash dividend payout ratio earlier this year, its stock price assumed a future yield of 4-5%. However, AT&T stock has afterwards fallen and increased its yield to 7%-8%. Some investors may believe that AT&T will meet its obligations and maintain this high yield after the spin-off. But if AT&T's stock price stays at $20, the company may decrease its payout ratio and high yield to preserve more cash.

AT&T needs cash because its wireless business still faces challenges shortly. At an up-to-date Wells Fargo conference, Jeff McElfresh, head of communications, warned that AT&T's wireless growth could "go flat" in 2022 after incentive checks and new 5G devices boosted sales in 2021. That negative outlook, along with stiff competition from T-Mobile and Verizon, could make steady growth difficult for the new AT&T.

AT&T is trying to heal its wounds, but the market does not give much credence to its recovery efforts. Analysts still expect the company's earnings to decline both this year and next year (not including the upcoming separation), and earnings growth will remain anemic.

Investors should understand that AT&T stock is cheap for obvious reasons, and they should not buy it until there are some positive results.

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