AT&T (NYSE:T) recently made a move that many in the investment community have long called for: The telecom titan announced the partial spinoff of its DIRECTV business.
This move, combined with back-to-back quarters of customer growth in its core telecommunications business, suggests AT&T may have finally turned a corner after a challenging 2020. Is now a good time to buy the stock?
To answer that question, let’s examine in detail where AT&T is today.
A company in transition
Despite its longevity, AT&T is now a company in transition. Its 2020 full-year revenue dropped nearly $10 billion from 2019’s $181.2 billion. AT&T ended 2020 with $171.8 billion as the pandemic’s impact caused store closures, lower income from roaming charges, and lost advertising revenue.
Its lower 2020 revenue combined with massive debt from the DIRECTV purchase and another pricey acquisition, Time Warner (now called WarnerMedia), meant AT&T needed decisive action to improve its fortunes.
Current CEO John Stankey, who took over the top spot less than a year ago, has been doing just that. He divested noncore assets and cut operational costs totaling about $2 billion in savings last year.
As AT&T rebuilds, its DIRECTV spinoff marks a significant milestone. DIRECTV, alongside WarnerMedia, was to play a part in an ecosystem of entertainment, phone, and internet services.
This ecosystem was supposed to help AT&T retain customers in the highly competitive U.S. telecommunications market. Instead, DIRECTV bled subscribers for years as customers switched to streaming services. Shedding this dying business allows AT&T to focus on the areas that deliver value to its customers.
One of those areas is HBO Max, the company’s new streaming video service. It replaces DIRECTV as the glue to retain customers as consumer preferences shift to on-demand entertainment.
To that end, Stankey made the controversial decision to release WarnerMedia’s 2021 film slate to HBO Max. The move offsets theatrical revenue lost to pandemic-induced theater closures while boosting HBO Max’s appeal. This and the DIRECTV spinoff are the kinds of actions AT&T needed to make to reverse its fortunes.
Recent financial results suggest Stankey’s efforts are paying off. AT&T experienced two consecutive quarters of growth in its most-valuable customer segment, postpaid subscribers.
Its postpaid net phone additions reached 1.5 million last year, the best increase in a decade. Its fourth quarter also marked AT&T’s second-lowest quarter of postpaid phone churn in company history, while its HBO Max subscriptions doubled from the end of the third quarter.
The shedding of DIRECTV comes at a crucial time as well. AT&T is in the midst of its nationwide 5G implementation. The advent of 5G brings additional revenue opportunities.
Customers require new 5G-enabled devices to use the faster 5G network. AT&T saw year-over-year equipment sales substantially increase in the fourth quarter to $6.1 billion from 2019’s $4.8 billion.
Its higher-priced unlimited wireless plans include 5G access. Over 60% of the company’s postpaid phone subscriptions were on an unlimited plan at the end of the fourth quarter.
Despite lower revenue, AT&T maintained its historically strong free cash flow (FCF). It generated FCF of $27.5 billion in 2020. Given the pandemic, this performance compares favorably to 2019’s FCF of $29.1 billion.
The bottom line
The positive momentum coming out of 2020 indicates AT&T’s turnaround efforts are bearing fruit. Its revenue should improve in 2021 as the pandemic’s impact slowly recedes.
But the company is not out of the woods yet. Its massive debt load will take years to whittle down. The company remains committed to its high-yield dividend, hovering near 7% at the time of this writing, but AT&T skipped a dividend hike last year for the first time in 36 years.
If you’re risk averse, it may be best to wait a few more quarters to see how 2021 unfolds for AT&T. Otherwise, there are compelling reasons to invest now while turnaround efforts and the pandemic recovery are still in their early stages. And you can enjoy an attractive dividend yield while you wait.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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