AT&T could give investors a giveaway that goes beyond its hefty dividend
Analysts Have More Favorable T-Share Views As TimeWarner Comes To A End
AT&T (NYSE: T) the stock is having its best week since the start of the summer. The T share is up 6.5% since December 16. The reason for the optimism stems from the upward revisions of two analysts. In both cases, the action has changed from Equal Weight to Overweight.
December 16, Morgan Stanley (NYSE: MS) AT&T improved. This was followed by Barclay’s which also upgraded the T stock on December 20. And even if Citigroup (NYSE: C) reiterated its Hold note on December 7, they acknowledged that the combination of WarnerMedia and Discovery (NASDAQ: DISCA). has the potential to double in value. They based their analysis on the strong free cash flow (FCF) generated by the two companies.
Is this enough to drive up AT&T stock? Maybe and maybe not. However, it may be enough to put a level of support on a title that badly needs it.
This does not mean that the T share is crying out to buy. Since hitting its 52-week high in May, T-share has fallen 27%. It’s always a business that offers more questions than answers.
And by way of full disclosure, I felt that the brief surge in action in July was akin to a dead cat bounce. However, I have also cautioned investors that they may not want to rush out of their AT&T shares. The reason is that, as I noted, the unknown is worse than the known. Basically, I thought that once investors had a chance to process the WarnerMedia trade, they might find that the T share was oversold.
And the dividend?
If you’ve held onto T’s stock during its recent turmoil, we need to take our hat off. This has not been easy. And the one thing that has kept more income-oriented investors from heading for exits is its dividend which, for now, remains one of the best available.
That will change when the company completes its WarnerMedia spin-off to Discovery. At that time, AT&T will reduce its dividend. This is the news that prompted many investors to hit the sell button.
But this is where the story remains unclear. The reason for this is that current AT&T shareholders are not sure exactly how they will receive the shares of the new company which will be called Warner Bros. Discovery (WBD).
By this I mean AT&T has not clarified whether the shares will be offered as a traditional spin-off or whether current T shareholders will receive an exchange offer. In an exchange offer, current shareholders would receive WBD shares but only after surrendering all or part of their existing AT&T shares.
You can see how confusing it can be. Because while AT & T’s dividend will certainly be reduced, it will not be suspended. And that means investors may not want to part with their stocks.
What about this debt?
Another concern investors have had about AT&T is its massive debt of around $ 150 billion that the company has to pay off with $ 7 billion in annual interest. However, on that note, a recent presentation to investors seemed to allay concerns.
AT&T will generate $ 20 billion in FCF after interest and transfer approximately $ 50 billion in debt to WBD. And if you consider that AT&T consistently generates FCF at a level more than twice the rate of its debt repayment.
All of a sudden, AT & T’s debt looks more manageable. Of course, that assumes that the company doesn’t have any other plans for all that money.
The result on T Stock
I still have the same on AT&T that I had in July. In other words, the company has yet to regain the confidence of its shareholders. And there must be more answers to come on exactly how current shareholders will receive shares of the new entity.
But analyst upgrades are a positive first step. And as shareholders receive their dividend, they can look at AT & T’s consensus price target which is currently above $ 30 per share. This may be enough to make the stock an attempt to buy for risk-tolerant investors.