I was very skeptical when I first analyzed AT&T at the end of 2015 (read more). Well, I was wrong as company is YTD +24% (after recent slide) What’s happened in multinational telco company that share price went up so significantly?

Looking on chart in 5 years perspective we can see that after consolidation at around $32 (dividend adjusted) shares went up, which from technical point of view means that company was rising faster than paying dividend but investors were underestimating it. Then investors realized and rerating happened. Do you believe in it? Not really – great, let’s look at fundamentals.

In the last years business was not growing. Then acquisition of DIRECTV happened and now we can see consolidated results growing:

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Nevertheless if we look more in details it is not as superb as it looks like from icon above:

  • Business Solutions business is flat
  • Entertainment Group is flat
  • US Wireless is down on revenues, flat on EBITDA (record margins, potential for decline?)

Well, acquisition of DIRECTV was a good move (DIRECTV merger synergies, On track to $1.5 billion+ run rate by end of year, $2.5 billion+ run rate by end of 2018), but from investor’s perspective whole group should be analyzed.

Company is generating a strong free cash flows – around $5b per quarter, guidance was for above $15b in 2016 – for market cap of $250b is nothing special for me. Dividend yield of around 4.7% is high comparing to other companies, but from 5Y perspective it is rather low (company was paying even around 6% in 2015). Valuation is around 7 times EBITDA or 14.3 times Earnings – it is not high, but the biggest part of business is flat.

Summing up, shares are up but I see no justified rationale for that. I am not interested in buying nevertheless key finding is: if company is high quality (AT&T) and is paying high dividend yield (>5% in 2015), then upside potential is definitely higher than downside risk.

 

Disclaimer T – no position