AT&T is multinational telco company providing mobile and fixed line and pay TV services. Company operates mainly in the United States and is in top 20 biggest telco operators in the world. Company presents following operational segments:
• Business Solutions – ~$70B revenue, 38% EBITDA margin
• Entertainment & Internet Services – ~$50B revenue, 22% EBITDA margin
• Consumer Mobility – ~$35B revenue, 42% EBITDA margin
Additionally company operates in Latin America/Mexico.
The biggest competitors are Verizon, Sprint and T-Mobile. I do not expect any significant player to appear due to a “moat” – high entry barriers (network).
In 2015 company closed acquisition of DirecTV (satellite TV provider) for $49B (payment both cash and shares -> dilution of current shareholders; $67B when debt included). Company was bought by 7.7 EV/EBITDA, which is in line with market valuation of TV providers. I see many synergies between AT&T and DirecTV.
During 3Q financial results presentation company presented updated guidance (as DirecTV Integration Begins):
New guidance seems attractive, nevertheless the key question is whether company will show a double-digit growth in long term. I know that people are using telco services more and more intensive, but historically company was not growing so fast, and competitive pressure on price cuts was strong. Moreover business is characterized by heavy capex. All in all it is hard for me to imagine that AT&T profits will grow at 10+% yearly for the next 10 years.
As it comes to financials (estimates):
Market cap ~ $215B
Net debt ~$123B
Payout ratio ~70%
Beta = 0.40
Dividend yield 5.4% (!!)
Estimated valuation ratios:
P/E = 12.9
EV/EBITDA = 7.1
AT&T is one of The Dividend Kings – company with 30 years of rising dividends (since 1985 year). Company is not growing very fast and so dividends are. This is why current yield is high, but growth prospects are weak. In last few years company was paying up to 7.5% dividend yield in 2009. Dividend yield was rarely lower than 5% in post-crisis era. Although 5.4% dividend yield seems at first sight attractive it is nothing special in case of AT&T. Valuation is attractive, but business is not growing so for me these ratios are just fair.
T is on its’ all-time highs – not interesting for me. If we look on historical perspective drawdowns of around 20% were good entry point in years 1985-1999. Then during dot-com bubble share price was so high that even drawdown of around 40% shouldn’t be taken as surprise. With 25% drawdown company would pay around 7.2% dividend yield, P/E would be around 10 – for not growing business it is OK for me. It means share price around $27. Quite low, but I don’t like long term slow growing businesses. Maybe 20% drawdown would be enough to buy…
Summing up, I see no story in buying AT&T at $34.
Disclaimer T – no position