(Reuters) – AT&T Inc is committed to spend as much as needed on the media business of newly acquired Time Warner Inc, Chief Executive Randall Stephenson told CNBC on Friday, with a plan to invest $ 21 billion to $ 22 billion in the combined company.
FILE PHOTO: Chief Executive Officer of AT&T Randall Stephenson arrives at a U.S. District Court in Washington, D.C., U.S. April 19, 2018. REUTERS/Carlos Barria/File Photo
“We’re not going to be penny-wise and pound-foolish here,” Stephenson said in an interview on the financial news channel. “We intend to invest.”
The No. 2 U.S. wireless carrier closed its $ 85 billion acquisition of Time Warner on Thursday and now faces the task of integrating a media company into its operations as it seeks to rival Netflix Inc , Amazon.com Inc and other technology companies providing entertainment directly to customers.
That will be the job of John Stankey, who will lead the company’s combined entertainment business. Stephenson said on Friday AT&T intends to preserve Time Warner’s creative culture.
He acknowledged such differences in an email to AT&T and Time Warner employees late on Thursday, a copy of which was seen by Reuters.
“As different as our businesses are, I think you’ll find we have a lot in common,” wrote Stephenson. “We’re big fans of your talent and creativity. And you have my word that you will continue to have the creative freedom and resources to keep doing what you do best.”
Stephenson told CNBC he expects AT&T’s debt levels to come down quickly in about a year, returning to normal levels within four years at about 2.3 times earnings before interest, tax, depreciation and amortization.
Some analysts have raised concerns about the high level of debt the company took on to acquire Time Warner, about $ 180 billion at the close of the merger, Stephenson said.
AT&T’s spending plans include investing more in HBO, the premium TV channel with the hit show “Game of Thrones,” and expanding HBO’s direct-to-consumer platform, Stephenson said.
Reporting by Sheila Dang; Additional reporting by Diane Bartz in Washington; Editing by Bill Rigby
Without doubt AT&T (T) has been generating substantial income for dividend investors. Equally indisputable is the fact that the development of the stock price has been consistently and greatly lagging the overall market. More importantly, with AT&T trading 15% below its 52-week high investors, in the worst case scenario, would currently require around three full years of dividends to just compensate for the capital loss.
The number one rule in investing is always to at least preserve capital and while a 6% yield looks good on paper it does not help if your principal declines almost three times more.
I have been caught on the wrong foot with AT&T as well as I quickly grew it into my largest portfolio position, both in terms of income and capital, as I focused too strongly on the former. It’s mind games here. With AT&T paying such a high yield you can easily get double and triple-digit income per quarter with relatively little capital which in turn motivates you to invest even more. What is largely neglected at this stage is that as the yield increases and reaches the illustrious 6% barrier this is also means that the markets place higher risk into the stock.
However, despite all the capital losses I have incurred (but not realized) so far, the stock’s current yield could still be a great long-term opportunity provided the outlook is not as bad as expected. Now that the Time Warner (TWX) trial is approaching its end (outcome remains as uncertain as always) and the proposed Sprint (S) and T-Mobile (TMUS) deal also receiving regulatory scrutiny, this 6% yield window is closing with the stock now trading below 6% for the first time in almost two months. Let’s review the investment case for a dividend investor.
What is going on at AT&T?
Source: AT&T Investor Relations
The stock is currently trading at a lackluster 7 times earnings implying almost no growth whatsoever as the company finds itself right in the middle of a complex and challenging business setup.
The outcome of the Time Warner trial, which is expected to close this week on Tuesday, has been lingering over the stock and the company like a Damocles sword with investors fearing the excessive post-merger debt load of AT&T in a hawkish interest rate environment but equally expecting that AT&T needs some sort of vertical integration in order to compete with one of its fastest growing competitors Netflix (NFLX). Regardless of the outcome investors react as if AT&T will lose either way. Also, if the trial does not get approved AT&T will have spent hundreds of millions on lawyers, bankers and penalty statements and even worse it will cast a big shadow of doubt across the entire M&A sector in a Trump-led U.S. administration.
It is highly subjective to speculate on the stock’s reaction to whatever decision is being taken but given Time Warner’s booming business and vertical integration opportunities I am certainly rooting for the DoJ to approve this deal. Everything else, not only for AT&T but in general for the M&A landscape, should be rather detrimental. AT&T is not building a monopoly here but simply complementing its very own chain of distribution with very useful content.
Speaking in terms of Time Warner, the company is really rocking. Revenues are up 9% in the fourth quarter and EPS came in at $ 1.60. That strong revenue growth was driven by all segments with Turner up by 22%, HBO up by 13.3% and Warner Bros. growing 10.8%. This has been of the strongest quarters for Time Warner and bodes extremely well for AT&T should the acquisition get approved.
In fact, despite the seemingly high acquisition price of $ 85B, Time Warner could be worth much more given that despite that impressive growth it is only valued at 14 times sales. On top of that Time Warner also generated strong FCF of $ 4.4B.
It will probably be painful to watch the court’s decision and investor’s reaction to the verdict but it should help the stock thereafter, possibly after some sort of algo-driven panic sell-off, as uncertainty decreases and the focus returning to fundamentals.
Speaking of fundamentals the first quarter of 2018 was a big disappointment with revenue missing by a whopping $ 1.27B. Following the completion of the costly DirecTV deal AT&T has grown its top line by more than $ 30B over the last 8 years but organically growth has been virtually flat. In terms of profitability AT&T has been able to post the obligatory $ 0.01 to $ 0.03 EPS increases which helped raise its dividend by $ 0.04 per share. However, cord-cutting has been a major issue for the company. Its customer base is growing strongly every quarter but so far this growth has come at the expense of cannibalizing customers with a higher customer lifetime value. In Q1 187,000 in the higher-margin linear video business were lost whereas AT&T added 312,000 in the OTT video segment yet overall its margin still declined by roughly 1pp Y/Y or around $ 1B in sales.
You don’t have to be an expert to recognize this setup is losing money right now but whether it is still a “LOSE” or rather a “WIN” over the long-term is a completely different question. In an earlier earnings call from last year management stated the following on that:
Our wireless customers are really valuable in the extension of their life through the lowering of their churn, and the ability to get entire families or entire groups of phones is really important to us. And so we strongly believe that that is value-accretive to the total operations of the total organization, and we monitor it on a very regular basis.
What could be even more value-accretive is how millions and millions of connected cars may lead to higher sales.
So we have millions and millions of connected cars out there, over 10 million connected cars out there. So we built this platform, and those are down in our Internet of Things in our connected device category.
But now what we’re finding is that 65% of the people who drive cars aren’t our wireless customers, so we’re finding a real opportunity to connect tens of thousands of those, almost 100,000 this quarter, with a prepaid offering to the connected car. And when they do that, they will pay us. It’s not a $ 4 or $ 5, it’s a $ 15 or $ 20 connection. And so it not only gives us a really great revenue opportunity and high margin, and that’s a lot better than a resale opportunity at a much lower, but it’s also an opportunity to show them what we can do and then potentially get the rest of their wireless business or get the rest of their video business.
This is a tremendous opportunity that so far I believe has been more or less completely overlooked by the market which gets easily caught up on sequential and Y/Y comparisons. While that might be important for traders, for long-term investors, it is just noise to be ignored.
An Income Strategy Session
Now that the stock is trading at a 5.9% yield as of its close, long-term oriented investors should really welcome that opportunity to add to their position. In essence, if you are a long-term investor, this is exactly the kind of market reaction you would like to see. It allows you to lower your cost basis while the business is making the necessary transformation steps towards the future. The day-to-day noise with heavily followed stocks like AT&T is tough to ignore, and it may be one of the most difficult challenges to have the conviction to hold and add to your position in these times.
To help cope with these unrealized losses, investors should take a step back and concentrate on the bigger picture. Long-term investors know how powerful dividend reinvesting really is, but in the heat of the moment, it is only natural to temporarily blend this out. If we project the 5-year returns with reinvested dividends of an initial $ 5,000 investment in AT&T at $ 33.83, we end up with the following metrics:
Investment value after 10 years: $ 12,243 or an almost 144% gain with the respective yearly net dividends depicted below, thereof $ 3,624 in net dividends and $ 3,619 worth of additional stock from reinvested dividends.
After 5 years the net YoC has already risen to above 6% and after 10 years it has almost reached 10%. This is a very conservative scenario as it does not factor in any stock price appreciation and only minimal dividend growth. In that scenario CAGR would only be 10.5% and is basically a worst-case scenario given that it is unlikely that T’s stock price will remain flat over the next 10 years. And even if it does it is a great way to accumulate reliable and substantial income for long-term oriented dividend investors.
Assuming the stock appreciates by 5% every year over the next ten years with all other parameters being unchanged we would end up with the following metrics:
Investment value after 10 years: $ 15,899 or an almost 218% gain with the respective yearly net dividends depicted below. The total returns breaks down into $ 3,457 in net dividends received, $ 4,298 worth of additional stock from reinvested dividends and $ 3,145 worth of stock appreciation on initial investment. Naturally, as the stock prices rises the yield declines and as such quarterly reinvestment of dividends yields lower net YoC compared to the upper scenario. However, capital appreciation vastly overcompensates this effect.
I am still bullish on the stock but as mentioned in a previous article have become a little bit more cautious as well as both the outcome of the Time Warner trial and AT&T’s ambitious 2018 FCF guidance have potential to further weaken the stock.
Still, over the long-run, as the two calculations above show, the prospects are very promising provided investors remain patient and not get overly obsessed about short-term fluctuations. You will probably not get rich with AT&T anymore but you can build up a growing stream of reliable and substantial income over time. Starting with an almost 6% yield appears to be a good opportunity to start and continue this journey.
For investors having been invested into the stock in the mid-to-high 30s patience is required even more but first one has to make up one’s mind as to what one expects from this investment. If you are expecting market-like or even market-beating returns in this environment you should definitely look elsewhere. If you treat the stock as one pillar of your portfolio targeted to generate reliable income this is the highest-yielding Blue Chip stock in America and based on market cap alone probably also around the world.
The 6% yield window of opportunity could close any time and if it does you may have to wait a very long time to get that opportunity again.
What do you think about AT&T and its prospects? Are you investing more on recent price weakness, holding your position or selling out and moving on to other investments?
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Disclosure:I am/we are long T, TWX.
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.
When news broke that AT&T (T) was purchasing Time Warner (TWX) in a cash and stock deal valued at $ 107.50 for Time Warner holders I felt very confident that the move would improve AT&T’s profitability and widen its moat. AT&T was (and remains) one of my largest positions, so the news was welcome as I previewed the prospective ecosystem where premium original content and provider flowed seamlessly together permitting AT&T to leverage both as a compelling consumer package.
AT&T has a lucrative history marketing ‘bundle deals’ via DirecTV/U-verse, phone and internet. Adding Time Warner’s content to the mix was like adding another weapon to their arsenal. The move would fortify their position in an era where content is king and the average American residence has nearly 3 TVs per household.
With more and more customers embracing OTT services like Netflix (NFLX) and ditching cable, AT&T recognized the writing on the wall and (potentially) acquired Time Warner to help mitigate the impact and diversify them away from their reliance on legacy telecom services.
Perhaps it was not only adding a weapon to their arsenal but adding a shield to insulate them from the evolving landscape. I credit the management team led by CEO Randall Stephenson for their proactive approach getting ahead of the curve.
Obviously Time Warner’s stock popped immediately on the news while AT&T’s gyrated as investors digested the antitrust risks and whether or not AT&T overpaid.
Let’s take a look at those risks now.
Did AT&T Overpay?
The buyout offer did not come cheap ($ 85B) and some analysts groaned that while Time Warner was a nice asset, it came at too high a cost. But obtaining regulatory approval would be no walk in the park and AT&T knew they were in for protracted litigation. Let’s look at the EPS and Revenue numbers for the last two FYs for Time Warner:
You will note that on an EPS basis, Time Warner jumped about 9% year over year from $ 5.86 to $ 6.41. Time Warner grew EPS over 20% the year before that. When the $ 107.5 price tag was initially applied to the prior 4 quarters of earnings in October 2016, the P/E ratio stood at approximately 21.
That did look a bit steep.
However, the deal has not closed and when applying today’s earnings to the buyout price, the P/E ratio dips to 16.7. That looks much healthier. You have to tip your hat to AT&T’s management here since they had the prescience to realize that while the initial premium to Warner shareholders seemed lofty, it allowed them to garner unanimous approval from both boards by offering a rich enough premium to Warner holders while not seeming reckless to AT&T holders.
Stephenson and company knew earnings would continue to rise for the content king and before (IF) the deal closes, they will look like geniuses as earning would have grown into the multiple applied at the time of the offer.
And that brings us to the elephant in the room: whether AT&T can out-litigate the DOJ in their pending antitrust case. President Trump has been vocal in his opposition to the buyout and may see it as fulfilling a campaign promise to defeat the deal. But Trump will not have the final word, it will be adjudicated in the courtroom not the political arena, however you would be naïve to believe that those worlds don’t intersect despite our system of checks and balances.
In the interim, AT&T has tried to curry favor with the Trump Administration by announcing bonuses to its employees and lauding the President for the tax bill. Nevertheless, the antitrust team is pushing ahead with bluster and bravado to paint the government as underdogs thwarting corporate strong-arming.
In November of last year I penned a post in the immediate aftermath of DOJ filing suit recommending purchasing shares of Time Warner during the turmoil called, “Time Warner: Heads I Win, Tails You Lose”. In just two days TWX share price plummeted from $ 95 to below $ 87. I quickly logged into my brokerage account to pick up shares of Time Warner in the $ 80’s.
In the post I explained why the volatility generated a perfect arbitrage opportunity, in summary:
This remains mostly true today, however Time Warner’s share price has since rebounded near $ 95 thereby shrinking some of the potential returns if the buyout is approved. While I have contacts within the antitrust division of the DOJ from my Washington days, they are not at liberty to speak about the case and therefore I know only as much as the public announcements trickling out on a daily basis.
And it is my opinion that the deal looks less likely to succeed now than it did 4 months ago when I wrote that post. But that reminds me of a saying by Clive Davis:
During the previous dip, I was on vacation with my wife refilling the gas tank when I checked the market news to find out that Time Warner was selling off. We waited at that pit stop probably longer than she preferred so I could buy shares since I knew that the dip was an overreaction and would not last.
This time, I am planning ahead by placing limit buy orders at $ 85 and below that are good-til-cancelled in the scenario where the DOJ wins and/or impactful news hits the stock causing a knee-jerk reaction. In essence the hypothetical case looks like this:
In the portion of the chart above circled, you will see a red candlestick where news adversely impacted a stock sending it cascading into free-fall. But you will also notice the rapid rebound where the stock recovered quickly above that price.
The window to pounce and take advantage of the dip was small. That is why I am preparing to maximize the opportunity if it presents itself again. I believe that owning Time Warner shares at $ 85 and below provides a margin of safety if the two parties are forced to go their separate ways.
Time Warner Flying Solo?
Will I be saddled with overvalued shares of Time Warner purchased at $ 85? I doubt it. Here’s why:
Growth for Time Warner shows no signs of abatement as each operating division increased revenue and profits in the latest quarter (yet again). HBO’s subscription revenues increased 11% and its unparalleled show Game of Thrones is not due back until 2019. I expect an even larger increase in the months building up to the premiere.
Additionally, on the heels (pun intended) of Wonder Woman’s success, and in the backdrop of the #metoo movement, I believe Warner Bros. has incentive to continue to produce content with powerful heroines. HBO produced an amazing women focused hit with Big Little Lies and it’s due back for a second season featuring Meryl Streep. HBO made a savvy move by riding the coattails of Reese Witherspoon’s success.
On the cable news front, CNN was rated the #1 network in primetime and total day viewership among young adults and tops in digital news as well (from their 4Q earnings release). Whether you believe the treatment of the Trump Administration is favorable or not, it has been favorable to the bottom line of CNN.
And those are just a few samples of the many reasons why I remain bullish on Time Warner.
No one knows for certain how the trial will shake out, but I am positioning myself for success no matter the outcome.
Disclosure:I am/we are long T, TWX.
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.
(Reuters) – AT&T Inc, the No. 2 U.S. wireless carrier, said it would launch fifth-generation (5G) mobile network service in a dozen cities in the United States by late 2018, after international wireless standards for the network were finalised last month.
The 5G technology is expected to provide higher speed and response times than 4G networks used today.
Reporting by Rama Venkat Raman in Bengaluru; Editing by Amrutha Gayathri
AT&T and Time Warner argued on Tuesday that their proposed $ 85.4 billion merger was “pro-competitive” and “pro-consumer,” as they sought to refute U.S. Justice Department allegations that the deal breaks antitrust law.
In a joint court filing, the companies focused on rebutting government efforts to show that AT&T, which owns pay-TV provider DirecTV, would raise rates for rival pay-TV companies to use Time Warner’s movies and TV shows.
They also argued that the government was wrong to worry that the deal would hamper the development of online video.
They did not mention President Donald Trump or the White House. Trump has repeatedly criticized Time Warner’s CNN news unit and announced his opposition to the deal before last year’s presidential election, saying it would concentrate too much power in AT&T’s hands.
Democratic Sen. Richard Blumenthal, who is skeptical of the deal, said last week he was nonetheless worried that the antitrust issue was being used for political reasons. Other lawmakers have expressed similar concerns.
The Justice Department last week sued AT&T to block its planned acquisition of Time Warner.
In the filing on Tuesday, the companies said that they operate in highly competitive markets which will remain competitive after they close the deal.
They noted that streaming service Netflix has 100 million subscribers globally, while tech firms Apple, Google and Facebook were investing billions of dollars in video. Hulu and Amazon were becoming contenders in video distribution, while others, like social messaging company Snapchat, were starting to enter the market, they added.
“Against this backdrop, the proposed merger of AT&T and Time Warner is a pro-competitive, pro-consumer response to an intensely competitive and rapidly changing video marketplace,” the companies said in the filing.
“This transaction presents absolutely no risk of harm to competition or consumers.”
The trial will be heard by Judge Richard Leon at the U.S. District Court for the District of Columbia.
Leon was nominated to the court by former Republican President George W. Bush and is no stranger to high-profile cases. Leon signed off on the Justice Department’s 2011 deal which allowed Comcast to buy NBC Universal and has heard a number of private antitrust cases. In the 1990s, he worked on House of Representatives panels looking at the Iran-Contra affair and the Whitewater controversy.
As a contract standoff between AT&T and 21,000 unionized workers in its mobile business drags into a eighth month, the employees are trying to increase political pressure on the carrier.
So far, 255 state and local politicians have sent letters to AT&T CEO Randall Stephenson backing the workers, the Communications Workers of America union says. Among the senders are six Democratic senators and numerous members of California’s delegation in the House of Representatives.
“While we are aware of the changes that have taken place in the telecommunications industry, we know that AT&T wireless workers are the driving force behind your most profitable division,” 12 members of the Arizona House of Representatives wrote to Stephenson in one recent letter. “They deserve to share in the company’s success and growth.”
Still, AT&T does not appear moved by the campaign or earlier moves by the mobile workers in 36 states and Washington, D.C., including a protest outside Apple headquarters for the debut of new iPhones last month and a short strike in May that forced many wireless stores to close for a weekend.
Although the workers have concerns about wages, health benefits, and other issues, job security and sales commission rates appear to be at the center of the dispute. To highlight the issue of call center jobs being outsourced to foreign countries, some AT&T workers traveled to the Dominican Republic in early May to meet with their counterparts there who now handle AT&T customer service calls.
AT&T said on Friday that it has been in touch with the letter writers and plans to continue to bargain with the workers, whose contract expired in February, to reach a “fair” agreement . “We regularly communicate with our stakeholders regarding labor issues and bargaining, and we’ve done so where we’ve received any letters from legislators,” an AT&T spokesman said.
The CWA says AT&T won’t negotiate over job security at call centers and retail stores where many of the employees work. “AT&T has increased its profits by cutting workers’ commissions, refused to bargain over job security even as it cut hundreds of call center jobs this year alone, and increasingly moved to low-wage contractors for its retail and call center operations,” Dennis Trainor, vice president for CWA district 1, said in a statement. “That’s not how America’s largest telecom should be acting.”
AT&T t has a long history of labor peace, though the May strike interrupted a run of more than four years without a walkout. The company says it has reached 32 agreements covering some 145,000 workers since the beginning of 2015. The strike in May, which also included 17,000 workers in AT&T’s telecom business, followed last year’s bitter, seven week strike at Verizonvz .