Risk and Reward With AT&T

The stock gets a downgrade, you get a bargain

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Jun 19, 2018
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AT&T (T, Financial) completed the acquisition of Time Warner a few days ago. It was almost immediately downgraded due to concerns over its debt, which is now closing in on $250 billion, making it the world’s most indebted company. Not a title to covet, but debt should never be an issue for AT&T since it has a massive audience across its television and telephone operations.

AT&T has more than has 150 million wireless subscribers in the U.S. and Mexico and had 47 million broadband customers. It's also considered to be the largest global enterprise phone company in the world.

Its DirecTV division has 20 million U.S. satellite television customers and Time Warner will add more content, bringing together global media and entertainment leaders Warner Bros., HBO and Turner. More importantly, the combined company has a platform second to none, affording it major competitive advantages.

AT&T already has an incredible brand, generates massive profits and has consistently good margins. Did it overpay for Time Warner? Yes. The $85 billion price tag seems high, especially considering that Time Warner will represent just 15% of AT&T’s business. But AT&T needed to pay up for both DirecTV and now Time Warner because time is running out for it to combat the challenges of tomorrow. Content providers have pricing power right now and HBO alone has an estimated 134 million subscribers, paying roughly $15 a month. That’s $24 billion annually right there, and that’s not going anywhere. If anyone can figure out how to lower costs to drive profit, it’s AT&T.

AT&T’s wireless unit accounts for 45% of sales and 55% of Ebitda, which together with Verizon holds 70% of the market. AT&T is the No. 2 player in the $180 billion industry but with T-Mobile and Sprint merging, more pricing pressure is sure to occur this year and next.

You buy the stock for the 6% dividend and hope that future growth just matches what it was over the last decade. You can expect high margins and regular payments. Do not expect a double-digit growth, but don’t be surprised if the stock isn’t 100% higher in 10 years or less. The company expects to earn approximately $3.50 in 2019. At 15x, that’s $52.50 a share. To think that a blue chip like AT&T wouldn’t warrant at least that is ridiculous.

Guru Ownership:
Jim Simons (Trades, Portfolio) owns 1.9 million shares.
Mario Gabelli (Trades, Portfolio) owns 1.2 million shares.
Ray Dalio (Trades, Portfolio) owns 1.05 million shares.
Joel Greenblatt (Trades, Portfolio) owns 660,000 shares.
Steve Cohen owns 152,000 shares and has calls and puts as well.

Disclosure: I am not long or short AT&T.