AT&T Stock: Timing is everything (NYSE: T)
Why Now is a Great Time to Buy AT&T
Yes, yes, I know you can’t time the markets. Yet you can knowingly determine the best time to start/increase a position in a stock. be. Here are the main reasons why I think now may be the perfect time to start or increase your position at AT&T (NYSE:T).
The sale of media assets is complete
AT&T recently completed the $43 billion deal with Discovery for Warner Bros. properties. The deal marks the end of three turbulent years for AT&T. It was a mistake to attempt vertical integration of communications and media infrastructure. It looked good on paper, but the panoply of positives on offer never materialized. Nonetheless, I thank AT&T management for stepping up when they did. With the recent drastic fall of Netflix (NFLX), it would appear that AT&T has shown “perfect timing” in exiting the media business, just as many are beginning to question the viability of streaming services.
Additionally, AT&T can now evolve as a pure-play wireless communication and fiber optic networking machine.
AT&T CEO John Stankey said:
“With the closing of this transaction, we expect to invest at record levels in our growth areas of 5G and fiber, where we have strong momentum, as we strive to become America’s best broadband company. At the same time, we will refine our focus on shareholder returns.”
AT&T just posted strong earnings
AT&T was a top gainer in the S&P 500 on Thursday, rising 4% after beating earnings expectations and surprising mobile subscribers to the upside in the latest earnings report. One of my tenants during times of high market volatility, like now, is that I suggest waiting to buy a stock after earnings rather than rolling the dice and buying into earnings. Even stocks that are beating in the current environment are selling on earnings. When the odds are against you, reduce the risk as much as possible by making the most informed purchases.
In the period ending March, AT&T beat expectations by earning 77 cents per share on $38.1 billion in revenue, including $29.7 billion from continuing operations, up 2 .5%. Net income from continuing operations was 65 cents per share.
Additionally, wireless revenues increased 5.5% to $20.1 billion, adding 691,000 subscribers, its highest level in a decade. On the wireline side, AT&T Fiber added 289,000 net subscribers, with penetration up about 2 percentage points to 37%.
So AT&T mopped up the slack by divesting media operations, will use some of the proceeds to reduce the debt burden, and said it would “adjust” the dividend. Let me talk about the dividend cut.
The current quarterly dividend per share is $0.2775 based on shares outstanding. The quarterly free cash flow required to cover dividends is approximately $2 billion. With free cash flow of approximately $2.9 billion for the quarter, the current payout ratio is approximately 69%. This level of coverage helps me sleep very well at night. Also, I expect it to increase as the business grows. Another major reason I doubled down on AT&T today is the current macro environment. Let me explain.
AT&T offers a tremendous margin of safety
Listen, here’s another market mantra you hear a lot and should stick to – “don’t fight the Fed”. When the Fed has a zero rate “free money” policy, as you would expect, things start to get a little crazy. Market participants find themselves caught up in long-lasting “historical” actions. These actions are largely based on potential cash flows expected in the distant future, commonly referred to as “long-lived assets”. However, when inflation hits and the Fed is forced to raise rates, the value of these future cash flows is greatly diminished. Therefore, market participants look for investment opportunities that currently have positive cash flows. AT&T fits the bill perfectly. Additionally, the company is focused on returning wealth to shareholders. Even after the dividend cut, the current yield is 5.66%, significantly higher than the current 10-year bond yield of 2.9%. Now, let’s sum it all up.
Timing is everything! With AT&T divesting media properties, repaying debt, sizing the dividend appropriately and possessing strong fundamentals, the stock offers a substantial margin of safety in highly volatile market conditions. A surge in inflation and a substantial rise in macroeconomic and geopolitical concerns caused markets to sell off. The selloff that occurred as I write this article caused my buy limit order for $19.60 on AT&T to be filled. I placed this order after the winnings. For any newcomers to the market who may be reading this article, never follow a stock high and buy after a beat in profits. More often than not, you will have the chance to buy it lower at some point in the near future. Thank you for your time and consideration in reading this article! I hope I provided some bits of value.