Investors’ optimism surrounding the proposed spin-off of AT&T Inc.’s (T) WarnerMedia to Discovery, Inc. (DISCA) through a Reverse Morris Trust drove T’s shares to their  52-week high of $33.88 on May 17. 

However, most investor interest fizzled out as soon as investors realized that the deal comes with a proposed dividend cut. Following the transaction with DISCA, T’s dividend payout ratio is expected to be in the low 40% range, and its annual revenue growth is expected to be in low single digits CAGR.

As a result, the stock is currently trading 11.4% below its 52-week high. Income-focused investors especially were disappointed by the dividend-cut news. Law firm Bragar Eagel & Squire also launched an investigation into DISCA on May 19, 2021 concerning DISCA’s board of directors’ oversight of an alleged unfair process and ultimate agreement to an inadequate merger deal. 

Here’s what we think could shape T’s performance in the near term:

Continuous Expansion of FirstNet Network

T has been building and expanding the FirstNet network, which is the nationwide network that enables first responders and public safety officials to stay connected in times of crisis. The company announced on May 17 that it added a new, purpose-built cell site to enhance coverage along U.S. 311, between Nelson Hill and Hwy 176. The new FirstNet Cell Site was also launched in Lewiston, Northeastern Minnesota, Texas, and Lycoming County, among others, in May 2021 to support first responders.

Solid Financials

For its fiscal first quarter, ended March 31, 2021, T’s total operating revenues increased 2.7% year-over-year to $43.94 billion. Its revenue from its WarnerMedia segment, which accounted for 19.4% of total revenue, increased 9.8% year-over-year to $8.53 billion, while its revenues from the communications segment increased 5.2% year-over-year to $28.18 billion. The company’s net income for the quarter came in at $7.94 billion, which represents a 60% year-over-year rise. Its adjusted EPS was $0.86 compared to $0.84 in the prior-year period.

Analysts Expect Moderate Revenue Growth

Analysts expect T’s revenue to increase 3.6% year-over-year to $42.58 billion for the current quarter, ending June 30, 2021. Its annual revenue is expected to increase 1.5% in fiscal 2021 and 0.1% in fiscal 2022. The company’s EPS is expected to decline 4.8% in the current quarter and 1.3% in fiscal 2022. Also, of 32 Wall Street Analysts that have rated the stock, 18 rated it Hold.

POWR Ratings Reflect Uncertain Near-Term Prospects

T has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. T has a C grade for Value. This is justified given 9.47x forward non-GAAP P/E, which is lower than the 20.13x industry average. But its forward non-GAAP PEG of 5.88x is 217.8% higher than the 1.85x industry average.

The stock has a C grade for Momentum also, which is in sync with its 3.5% gains over the past three months and 0.3% loss over the past month.

Beyond what we’ve stated above, we’ve also given T grades for Quality, Sentiment, Stability and Growth. Click here to see all of T’s ratings.

T is ranked #4 of 25 stocks in the Telecom – Domestic industry.

Better than T: Click here to access three top-rated stocks in the same industry.

Bottom Line

According to a yahoo finance report, T admitted that it made a terrible mistake getting into the media business. Only time will tell if focusing on its core telecommunications business is a prudent move or if this is yet another “mistake.” So, we think it’s wise to wait until there is more certainty over the impact of its spin-off of WarnerMedia.

T shares were trading at $29.91 per share on Monday morning, down $0.10 (-0.33%). Year-to-date, T has gained 7.65%, versus a 12.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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