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Ma Bell Deserves a Break

October 24, 2018

AT&T (T) was brave to report its third quarter results before the market opened this morning. Usually, the premarket is for companies that want to lead off the day with good news to get the stock off and running as the bell is rung at the venerable New York Stock Exchange.

Let’s get it out of the way—the company missed its earnings number, coming in at 90 cents a share against an average estimate of 94 cents and a range of 89 cents to $1.03. Moreover, 5 cents of that is attributed to the Time Warner companies. This, of course, was the result of the $85 billion deal in June of this year that brought Warner Brothers, Turner Broadcasting and HBO into the fold of Ma Bell.

AT&T stock has been punished in this morning’s trading, knocked down $2.50 a share, equating to a drop of 7.50% this morning. And with the general market going through its jolt of recent, the stock is down 21.40% on a year-to-date basis.

Oh dear.

Let’s go through the numbers. The big one was an overall loss of 232,000 wireless subscriptions. That ends the streak of five straight quarters of reported gains. The company cites the loss of wireless tablet accounts. Tablet accounts dropped by 420,000 in the quarter. The company argues that despite the growth in video content for tablets, customers are figuring out that they don’t need to pay for dedicated lines for the devices, which can work off of Wi-Fi networks and mobile hotspots, including phones.

Pay TV was also down, with losses overall for DirecTV and its U-Verse satellite and cable offerings. Again, the company cites the overall market shift to streaming away from dedicated content services.

Time Warner’s net contribution was small at 5 cents as noted above, but it did turn in some good dollar figures. Warner Brothers generated revenues of $3.7 billion producing several successful films. Turner, including CNN (the bane of President Trump), generated $3 billion. And HBO threw $1.6 billion onto the cash pile for the quarter.

Overall revenue was up for the overall company. But if you back out the Time Warner contributions, AT&T’s organic revenue was down 5.62%.

But there is some good news embedded in the numbers. In North America, which is the core market for the company, AT&T did pick up 4.3 million wireless subscriptions, offsetting global losses. And in the pay TV units, it managed to gain 38.8 million customers.

I understand the market punishing AT&T stock on the earnings miss. The stock market is in a very bad mood and not interested in growth stories right now. But the Time Warner assets have really not begun to be fully integrated.

The content, from news to entertainment, is set to provide a world of revenue from streaming services that will be offered both on the company’s networks and on a stand-alone basis. And the cost savings for the existing pay TV units for content will be major and will help bolster margins.

But for me, I like the company for its dividends. The company is currently paying 50 cents a quarter, which equates to a yield of 6.54%, which is extraordinary for a major American company, particularly in the communications utility business.

AT&T’s dividend is projected to increase in the company’s declaration on December 14, to 51 cents. This continues the five-year average dividend payout gains of 2.13%, comfortably ahead of core US inflation.

That makes for a great income stock, in my book.

But it gets better.

The company is cheap. I mean really cheap. Right now, you can buy this big dividend payer, with a payout ratio of under 42%, at a price to book at 1.33 times. And the stock is priced at only 1.21 times its trailing revenues. That’s a big discount to its peer, Verizon (VZ), which you can read more about here. The market has punished AT&T, driving down its price—the price to book was at 1.93 times in December 2017, and the stock was priced at 1.50 times sales in February of this year.

I see this as a great bargain buy now for income, with the expectations for rising distributions above inflation. And there still may very well be a pony in there somewhere when the Time Warner box gets fully unpacked, leading to some gains in underlying value and revenues as well.