AT&T: Keep Buying As Long As The Market Keeps Ignoring

Summary:

• AT&T’s share price is down almost 4% YTD, with a market capitalization just under $120 billion and a dividend yield of almost 7%.
• The market is not a fan of AT&T’s struggles and hefty debt load, but strong overall shareholder returns are expected as the company continues to execute.
• The largest risk to AT&T’s thesis is operating in a competitive market with massive capital expenditures and a rising interest rate environment.

AT&T (NYSE:T) continues to see weakness in the market, with the company’s share price down almost 4% YTD. The market capitalization is just a hair under $120 billion, with a dividend yield of almost 7%, as the market continues to not be a fan of the company’s struggles and hefty debt load. However, as it continues to execute, we expect strong overall shareholder returns.

AT&T Business Priorities

AT&T is focused on continuing to execute on its core fronts, specifically Fiber and 5G. The company is doing well.

The company has one of the largest 5G portfolios in the market, although it did have some stumbling blocks to get there, operating in an oligopoly with T-Mobile and Verizon. The company’s fiber portfolio is one of its fastest growing businesses, generating billions in additional revenue, helping to highlight its strength.

The company remains efficient, with another $2 billion in costs and hefty investments. The company expects to hit its target debt load by 1H 2025, while providing both a strong dividend and high FCF. While higher interest rates remain a risk to the company, the company is clearly maintaining strong execution within its core competencies.

AT&T Growth

The below chart for the YoY comparisons helps to highlight how the company’s growth remains strong.

The company saw 3% YoY growth in postpaid phone subscribers, combined with 1% growth in ARPU. Mobility services revenue went up more than 3% as a result, and combined with strong margin improvement, the company’s mobility EBITDA went up by 7% YoY. That strong performance is the company’s largest business and biggest source of shareholder returns.

The company’s fiber business had even stronger growth, with double-digit growth in user count and mid-single digit growth in subscribers. That resulted in revenues growing by almost 20% for the business, making this the company’s fastest growing business. YoY revenue growth was almost $1 billion annualized.

The company continues to perform well versus its peers both in churn and in revenue growth as customers remain excited about the company’s service offerings. The company’s fiber business has replaced declines in its non-fiber business, and with minimal large-scale competitors, or downsides to large-scale competitors (like data caps with Xfinity), the company has performed well.

The company remains the source of a majority of broadband industry net additions, and we expect strong continued growth.

AT&T Financial Performance

Putting all this together, AT&T’s financials are quite strong despite the market’s opinion.

The company earned $30 billion in revenue for the quarter, down just a hair YoY. However, the company managed to improve its margins fairly substantially by roughly 6% from 35.1% to 36.8%. That enabled mid-single-digit growth in the company’s EBITDA. Adjusted EPS declined slightly, but both CFFO and FCF remained strong.

The company earned $7.5 billion in CFFO for the quarter, and despite hefty capital investments of almost $5 billion, the company had $3.1 billion in FCF. That puts the company at a double-digit FCF yield despite strong continued investments. That strong financial performance will enable both dividends and growing shareholder returns.

AT&T Capital Allocation

The below shows the company’s capital allocation goals as it continues to invest heavily. It continues to target spending a staggering $21.5 billion on its business in 2023.

The company is taking advantage of its strong cash flow. It has managed to decrease net debt-to-adjusted EBITDA from 3.2x to 2.9x, reducing net debt of $6 billion. The company managed to repay $4.7 billion of long-term debt maturities in the quarter, with its massive amount of cash flow. The company also managed to reduce vendor and direct supplier obligations.

The vast majority of the company’s debt is fixed, which protects it in an environment of rising interest rates. More than 95% of the company’s long-term debt is fixed, with an average maturity of 16 years and an average rate of 4.2%. That means the company has just a few billion dollars of debt due with roughly $5 billion in annual interest payments it can comfortably afford.

That investment along with strong interest makes the company a valuable investment.

AT&T Guidance

The company’s guidance is for a stellar year despite the tough overall market, which will support hefty shareholder returns.

The company expects roughly 3% growth in wireless service revenue and high-single digit growth in broadband revenues. Costs are expected to remain well managed, with adjusted EBITDA growth up 3% as well. The company is expected to invest massively in the business with roughly $21.5 billion in capital investment, but after that FCF is still expected to be $17.5 billion.

That’s an almost 15% FCF yield and highlights the company’s strength. That’s also after the company’s manageable debt, with roughly $5 billion in interest expenditures. The company’s debt load is incredibly manageable with long-dated interest, and the company’s FCF is plenty to paydown the debt. That will enable FCF to grow.

The company pays a dividend of almost 7%, costing it roughly $8 billion. That’s something it can comfortably afford, with the dividend using up less than half of its FCF. We’d like to see the company aggressively repurchase shares at its current valuation.

Thesis Risk

The largest risk to our thesis is that AT&T operates in a competitive market with massive capital expenditures. The company also has a hefty debt load in a market where interest rates are rising. It needs to continue generating FCF and pay down the debt to reorient the market’s views. That can take time when the company struggles to generate shareholder returns.

Conclusion

AT&T has worked to drastically improve its portfolio and its ability to drive shareholder returns. It is no longer a shrinking company, as its core mobility business is continuing to grow, enabling it to outperform its peers as the company has a strong and reliable offering. At the same time, the company is also growing its fiber business.

Its fiber business is the most exciting in the country, and AT&T remains a dominant and rapidly growing player. The company’s debt is incredibly manageable, and the company has an incredibly strong FCF. We expect the company to use that FCF to drive strong shareholder returns, making it a valuable long-term investment.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of T either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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