Analysts More Favorable Of T Stock As TimeWarner Deal Nears Completion
AT&T (NYSE:T) stock is enjoying its best week since early summer. T stock is up 6.5% since Dec. 16. The reason for the optimism is stemming from two analysts' upgrades. In both cases, the stock was upgraded from Equal Weight to Overweight.
On Dec. 16, Morgan Stanley upgraded AT&T. That was followed up by Barclay’s which also upgraded T stock on Dec. 20. And even though Citigroup reiterated its Hold rating on Dec. 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) being generated by the two companies.
Is that enough to move AT&T stock higher? Maybe and maybe not. However, it may be enough to put a level of support on a stock that badly needs it.
Questions Remain
That doesn’t mean that T stock is screaming buy. Since hitting its 52-week high in May, T stock has dropped 27%. This is still a company that is offering more questions than answers.
And by way of full disclosure, I felt that the stock’s brief spurt in July was akin to a dead cat bounce. However, I also cautioned investors that they may not want to hastily dispose of their AT&T shares. The reason is that, as I noted, the unknown is worse than the known. Essentially, I believed that once investors had a chance to process the WarnerMedia transaction, they may find that T stock was oversold.
What About The Dividend?
If you’ve held onto T stock through its recent turmoil, we have to tip our hat. It hasn’t been easy. And the only thing that has kept more income-oriented investors from heading for the exits is its dividend which, for the time being, remains one of the best available.
That will change when the company completes its spin-off of WarnerMedia to Discovery. At that time AT&T will cut its dividend. That was the news that prompted many investors to hit the sell button.
But this is where the story remains unclear. The reason is that current AT&T shareholders don’t know exactly how they will receive shares of the new company which will be called Warner Bros. Discovery (WBD).
By this I mean that AT&T has not clarified whether the shares will be offered as a traditional spin-off or if current T shareholders would receive an exchange offer. In an exchange offer, current shareholders would receive WBD shares but only after they give up all or part of their existing AT&T shares.
You can see how this can be confusing. Because while AT&T’s dividend will certainly be cut, it won’t be suspended. And that means that investors may not want to part with their shares.
What About That Debt?
Another concern that investors have had about AT&T is its massive debt which is approximately $150 billion that the company has to service with $7 billion in annual interest. However, on this note, a recent investor presentation seemed to allay concerns.
AT&T will be generating $20 billion in post-interest FCF and they will be passing off approximately $50 billion in debt to WBD. And when you consider that AT&T consistently generates FCF at a level more than twice the rate of its debt payments, all of a sudden, AT&T’s debt looks more manageable. Of course that assumes the company doesn’t have other plans for all this cash.
The Bottom Line On T Stock
I’m left with the same thought about AT&T that I had in July. That is, the company still has to regain the trust of its shareholders. And there need to be more answers forthcoming about exactly how current shareholders will receive shares of the new entity.
But analyst upgrades are a positive first step. And as shareholders collect their dividend, they can look at AT&T’s consensus price target that currently is over $30 a share. That may be enough to make the stock a tentative buy for risk-tolerant investors.