Shares of AT&T Inc. (T, Financial) gained as much as 6% Thursday following earnings results, before closing up 4.2% for the day. In doing so, shares reached a price level not seen since last year. The stock is also up almost 10% in 2021.
While shares may not be as undervalued as they were just a few months ago, I believe that AT&T should continue to be held both for its improving business results and its safe high yield. Let's take a look.
Earnings highlights
AT&T reported earnings results for its first quarter of fiscal 2021 on April 22. Revenue grew 2.6% year-over-year to $43.9 billion, beating Wall Street analysts' estimates by $1.2 billion. Adjusted for merger expenses, AT&T's earnings per share of 86 cents was a 2.4%, improvement from the prior-year quarter and 8 cents better than expected.
The company added a net 595K postpaid phone subscribers while postpaid net additions totaled 823K. Both figures were higher than the market had expected. This compares favorably to peer Version Communications (VZ, Financial), which lost a net 178K postpaid phone net additions.
Looking closer at individual segments, Communications grew 5.2% to $28.2 billion. Total Mobility additions of 3.55 million topped estimates by 80K. Revenues for this business grew 9.4% to $19 billion due to a 45% increase in equipment revenues. Service revenues were higher by just 0.6%.
Business Wireline fell 3.5% to $6 billion, primarily as a result of higher customer demand for more advanced internet provider options. Consumer Wireline was lower by 0.4% to $3.1 billion due to weakness in legacy voice and data services. One positive here was a solid increase in fiber subscriber growth and IP broadband average revenue per user.
Revenue for the WarnerMedia segment increased almost 10% to $8.5 billion. Advertising benefited from the return of the NCAA Men's Basketball Tournament this year as revenues were up 19% to $1.8 billion. Higher demand for theatrical releases resulted in a 3.5% improvement in content revenues.
Growth in WarnerMedia was mostly driven by a low double-digit improvement in subscription revenue due to gains in HBO Max and HBO subscribers. Direct-to-consumer revenues were up 35%. Leadership stated that HBO Max subscribers grew by more than one-third year-over-year to 44.2 million in the U.S. Compared to the prior quarter, U.S. subscribers increased by 2.7 million. Global subscribers increased 19% to 63.9 million. The company expects to expand to a total of 60 international markets by the end of 2021.
Latin America was the lone segment to post a decline from the prior year. Fortunately, this is the smallest portion of AT&T. Revenues decreased 13.6% to $1.4 billion due to currency exchange headwinds and the ongoing impact of the Covid-19 pandemic.
Balance sheet
AT&T's balance sheet remains a work in progress. As of the end of the first quarter, the company had current assets of $62.8 billion, including $11.3 billion in cash and equivalents. This compares to $76.6 billion of current liabilities. Long-term debt stands at $160.7 billion, but is below the $180 billion level that AT&T had on its balance sheet following the completion of the TimeWarner acquisition. Debt due within the next year is still sizeable at almost $20 billion.
That said, AT&T has plenty of cash on hand and expects to generate $26 billion of free cash flow during the full fiscal year. The company should have between $8 billion to $10 billion of free cash flow following dividend distributions that can be used towards paying off maturing debt.
The company's effort to reduce its debt load have seen small improvements. Interest expenses was lower by nearly $150 million in the first-quarter. Weighted average maturity is 16 years, which shows that debt coming due is at least spread out, and the weighted average interest rate declined 50 basis points from the prior year to 3.8%. Considering rates are very low at the moment, AT&T could potentially rollover more of its maturing debt at lower rates.
Valuation
AT&T expects revenues to grow approximately 1% in 2021 with adjusted earnings per share in-line with last year's result of $3.18.
AT&T closed the most recent trading session at $31.36 per share. Using company guidance of stable earnings per share, the stock has a forward price-earnings ratio of 9.9.
The company has traded with an average price-earnings ratio of 12.4 since 2011. While the stock has railed a fair amount recently, it still trades below its long-term average valuation.
Admittedly, AT&T looks less attractive when using the stock's intrinsic value as calculated by the GuruFocus Value chart:
AT&T has a GF Value of $29.59, which gives the stock a price-to-GF-Value ratio of 1.06 after Thursday's trading session. GuruFocus rates AT&T as fairly valued, so the rally hasn't made the stock too expensive compared to its GF Value.
Final thoughts
AT&T's first-quarter results were solid. Revenue and adjusted earnings per share both were higher compared to the prior-year period and beat estiamtes. Most of the company's businesses performed well, especially HBO Max.
The GF Value might estimate otherwise based on analysts' estimates of contraction in the top line over the coming years, but I believe AT&T to still be cheap using other valuation methods. For one, shares remain undervalued against the 10-year average price-earnings ratio, implying that further gains could be in the offering.
On the other hand, most investors likely have a position in AT&T for its dividend. Even after the recent rally, shares yield 6.6%, which is more than a full percentage point above its 10-year average yield of 5.6% and four times the yield of the S&P 500. If the stock were to average this yield for all of 2021, it would be AT&T's second highest average yield since at least 2005.
To put it another way, AT&T has rarely paid as generous a dividend as it is at the moment, even after a double-digit increase in share price. Just as important, I think the high yield is likely very safe as the payout ratio for earnings per share and free cash flow are both projected to be in the mid-60% range.
The improving business, dividend yield and valuation that remains below the long-term average reaffirm my belief that AT&T shares aren't done going higher. I believe the stock can still be bought at today's price.
Author disclosure: the author has a long position in AT&T and Verizon Communications.
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