Morningstar | We're Adding AT&T to Our Best Ideas List
We’ve long disliked AT&T’s capital allocation decisions, including the acquisitions of DirecTV and Time Warner. With considerable skepticism around the firm’s telecom and media integration strategy and fears concerning its debt load, investors have punished AT&T shares. However, given the size of the moves AT&T has made recently and the firm’s emphasis on reducing leverage, we don’t expect another costly strategic shift any time soon. As a result, we believe the shares are now attractive for investment.Looking at the firm as it is now, we believe both the wireless and media businesses remain well positioned competitively and that these units will produce stable cash flow for years to come, enabling the firm to quickly repay debt. Since the end of the second quarter of 2018, when the Time Warner deal closed, net debt has declined $7.7 billion to $169 billion, taking leverage down to about 2.8 times adjusted EBITDA from 2.9 times. With the sales of AT&T’s Hulu stake and real estate in New York bringing in nearly $4 billion in proceeds, we expect the firm will cut net debt to $150 billion by the end of 2019, or about 2.5 times EBITDA.
At current prices, AT&T shares are trading at less than 9 times our 2019 earnings projection and at a 16% discount to our $37 fair value estimate. In addition, the stock offers a dividend yield of 6.5%, a wide gap versus Verizon at 4%. We expect investors will view this yield as more sustainable as AT&T continues to use excess cash flow to reduce debt.
AT&T is a holding company. Through its subsidiaries, the company is a provider of telecommunications, media and technology services. The company's Communications segment provides wireless and wireline telecom, video and broadband services. The company's WarnerMedia segment includes media and entertainment businesses that principally develop, produce and distribute feature films, television content, and other content globally; and operate digital media properties. The company's Latin America segment provides entertainment services in Latin America and wireless services in Mexico. The company's XANDR segment relies on using data from its customer relationships, to develop digital and video advertising that is relevant to consumers.
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