It is also doubtful if the company will reach its target of net debt to EBITDA of 2.5x by 2025.įigure 3: Total return comparison of AT&T and T-Mobile with SPY. This leaves little room for the management to make additional capital investments. The company is now spending close to $8 billion on dividends annually, while FCF is targeted at $16 billion. ![]() WBD stock has dipped by over 50% since the spinoff, while AT&T stock has adjusted to a price level where yield is over 7%. However, this arrangement has not given good returns for investors. ![]() Dividends look shakyĭuring the spinoff of AT&T and WBD ( WBD), investors saw a dividend cut while getting additional shares of WBD. This will have a direct impact on the long-term viability of its dividend which is now yielding close to 7.2%. But the long-term ability of AT&T to maintain a solid FCF is less likely as the pressure to improve the network coverage increases in the 5G era. It is certainly possible that the management can get close to this target if the next few quarters don't give a negative surprise. AT&T's management was quite sure when they announced that they will meet their $16 billion FCF target. Revenue growth and margin expansion are very low for AT&T which reduces the ability to increase FCF. The management has the option to rein in these capital investments but it could then end up hurting the network quality compared to the competition.įigure 2: Quarterly capex expense among the big three telecom companies. The net result of this is that we could see the free cash flow come under intense pressure. However, even in the longer term, AT&T is facing significant competitive pressure which will force the company to continue to have massive capital investment. No guarantee of future free cash flowĪT&T's management has been adamant that they will hit the $16 billion mark in FCF in 2023 despite a slow first quarter. This makes the stock more volatile instead of a stable dividend-yielding value stock. Another correction in stock price by 20% can cause the enterprise value to be 2.6 times the market cap. This trend will only increase if there is a further decline in the stock price. Hence, any doubt over the ability of the company to pay its long-term debt will have a much bigger impact on the stock price.įigure 1: Impact of recent correction on market cap and enterprise value of AT&T. At the current price, every 1% decline in enterprise value will cause 2.3% dip in AT&T's market cap. The enterprise value is $254 billion while the market cap of the stock is $110 billion. The massive debt taken by AT&T has led to bigger swings in the stock as the market cap declines. This correction might look overdone but the enterprise value of the stock has dipped by a mere 10%. ![]() Impact of price correctionĪT&T stock price has declined by over 20% since mid-April. AT&T remains a value trap under these circumstances and is unlikely to beat the market returns in the near or medium term. These factors reduce the security for dividend paid, which is one of the key reasons supporting the current price level of the stock. The company still needs to make massive capital investments to plug any gaps in network quality. This will also make it difficult for the company to reach the management target of 2.5x ratio for net debt to adjusted EBITDA by 2025. The 20% dip in stock price led to a 10.5% percent decline in AT&T's enterprise value, which includes its massive debt.Īny negative impact on free cash flow can create new challenges to pay this massive debt. Investors looking to make a value play at the current price should also look at the broader challenges faced by the company. In a previous article in March 2022, it was mentioned that higher dividend yield will not prevent AT&T stock from underperforming. This has reduced PE ratio to less than 7 and increased the dividend yield from 5.5% to 7.2%. ![]() AT&T ( NYSE: T) stock has declined by over 20% since mid-April.
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