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AT & T (NYSE: T) has become much larger in the last two years. After the successful acquisition of DIRECTV and Time Warner, today WarnerMedia, the wireless technology giant is now also a cable media giant. AT & T is the second-largest wireless service provider in the United States after Verizon Communications (NYSE: VZ) . It also has the largest base of video subscribers when you combine its U-Verse, satellite and streaming activities. And his collection of media networks and movie studio under WarnerMedia is one of the best in the industry.
With stocks trading at historically low valuation levels, investors may see an opportunity to buy a stock with stable cash flow and return of capital to shareholders. AT & T 's 6.3% dividend yield is quite high, and AT & T has been rising every year for 34 consecutive years. AT & T is a good low risk dividend investment
Image Source: AT & T
AT competitive advantage
& T
A good company for investing has a competitive advantage in profit margin and cash flow. For AT & T, its biggest advantage is its scale.
In wireless, which requires very high fixed costs to build a cellular network, AT & T can spread its cost over many more customers than smaller competitors like . ] (NASDAQ: TMUS) and Sprint (NYSE: S) Can. This allows the company to produce much higher profit margins and higher returns on invested capital.
AT & T's EBITDA margin is consistently in the high range of 30% to 40%. Verizon's EBITDA margin is in the mid to high range of 40%. Comparatively, T-Mobile and Sprint have EBITDA margins of the order of 20% medium to high
AT & T is experiencing scale benefits to a lesser extent from its satellite television operations which also have fixed costs. But the variable costs for the maintenance of each customer, including ongoing installation and licensing fees, do not offer the same margin protection.
The media sector certainly enjoys scale advantages since it costs so much to produce a series or a film. people pay to see him. But WarnerMedia is not bigger than other major cable media companies.
AT & T has a gap around its wireless business – its largest segment – but its other companies are not as well positioned.
The wireless industry has been very competitive lately, but the proposed merger between T-Mobile and Sprint could calm people's minds. The two smaller carriers have aggressively sought out more customers in order to realize the scale advantages that AT & T and Verizon have. If the two companies merge, they could become less aggressive as the new entity would have a similar scale to that of AT & T and Verizon.
Meanwhile, AT & T is facing a difficult situation in pay TV. While it's starting to add subscribers, thanks to its DIRECTV Now streaming service, these subscribers are arriving at a much lower margin. The EBITDA margin on its entertainment segment has increased from 24.2% to 20.7% in the last two years. Time Warner saw its operating margin drop in 2017 as well as its cost of content increase at Turner and HBO, but the business figure did not keep pace.
The cut of the cord continues to weigh on the activity pay TV and media. As the trend accelerates in 2018, AT & T will be struggling to increase its pay-TV subscription revenues as well as WarnerMedia's affiliate fees
One thing that should worry the AT & T investors
After the acquisition of DIRECTV and Time Warner AT & T has accumulated a heavy debt. Although it is unlikely that AT & T will not repay its debt given its considerable cash flow, paying the principle and interest of $ 180.4 billion in debt will cost a lot of money. money every quarter.
In addition, the acquisition of Time Warner added 1.185 billion shares outstanding for AT & T. Paying the annual dividend on these shares will cost $ 2.4 billion in cash each year at the rate of current dividend. With a high level of debt and new shares outstanding, AT & T could continue the trend of extremely low dividend increases to maintain its trend at 34 years. But when faced with unexpected challenges in one of its core businesses – wireless, pay TV and media – investors could see negative consequences in the return of capital program. Given the intensity of competition in all three areas, it's a real possibility
Is AT & T a buy?
AT & T is currently trading for a price / cash flow ratio of only 10.84. This is an estimate that the stock has not seen since 2013.
That said, AT & T does not grow much. The acquisition of Time Warner allows it to reduce the costs of its pay-TV segment by reducing the costs of negotiating license agreements, but this initiative offers no real synergy of revenue. Investors should not expect strong growth from the company over the next few years as competition in the wireless industry remains strong and replacing former linear TV subscribers. DIRECTV Now.
I think that AT & T's debt and its positions in the highly competitive wireless market and the declining pay-TV market make the company unattractive. Even at such a low price, I would not buy it. Investors who think that AT & T's cash flow will do more than cover its debts and provide enough capital to return them to shareholders could seize the opportunity to lock in a return of 6.3%.
