AT&T is one of the most proclaimed companies in the United States. They have routinely placed in the top 50 largest companies in the world by revenue according to Fortune. This has always made AT&T a stock worth investing in for the long term.
In this article, I layout some of the characteristics about the company that could make it a great long-term prospect.
For example, in 2020, AT&T had over 182 million mobility subscribers. This includes cell phone users and any connected device to their network.
From a communications standpoint, AT&T is clearly a company that has left its mark in history. Without the company, one could wonder what the network provider and business environment may look like.
Why do I say business environment?
AT&T is a large provider of fiber for internet connectivity. According to their annual report, ‘Fiber is also important in keeping businesses connected. At the end of 2020, more than 625,000 U.S. business buildings — connecting more than 2.5 million business customer locations — were lit with fiber from AT&T”.
Moreover, it hasn’t been easy for the company to progress to those numbers.
The AT&T company formed from a series of rebranding’s, mergers, and break ups. Originally, the company was formed from Bell Telephone Company after Alexander Graham Bell patented the telephone in 1875. Thus, the company has a long history worth investigating.
According to investopedia.com, the company broke off into seven “baby bells” as they were called in 1984. Most of these break ups were done to offer better services to its customers by providing a more center focused company. It wasn’t until recently that all the bells were together again forming the company we know today.
One of the significant bright spots about AT&T is the growth in revenue that has been accomplished over the years. Let’s look at some additional details about the company that give it an edge over other wireless providers.
Check the numbers:
According to Macrotrends, AT&T has seen its revenue grow from roughly 120 billion to 180 billion dollars. Moreover, the company posts a great amount of cash flow every year, usually in the range of 15-20 billion. One of the reasons AT&T has been able to sustain the debt burden it has is the efficiency of its operations.
Not many companies can make the cash that AT&T has in the past decade. One question remaining though is can they become more efficient by removing some debt?
A look at a recent chart suggests investors don’t believe so.
AT&T has come under fire mainly for their acquisition selections and their long-term debt.
According to their annual filing, AT&T purchased satellite tv provider DirecTV a few years ago. This made headlines because they paid 40 billion dollars for the purchase and only a few years later they have divested the asset.
On top of that, the company also recently purchased Warner Brothers Media for a staggering 80 billion. They also sold this asset with the transaction being completed this year in 2022. AT&T has been able to make such acquisitions because they make a great amount of free cash flow every year. Yet, the debt has been piling up from such purchases and investors wonder if this will lead to tougher decisions later down the road.
According to their annual filing, at one point, AT&T had over 150 billion dollars of long-term debt.
Still, the company has acknowledged that they must improve. One of the major reasons it gave for selling such a large asset like the Warner Brothers business is to cut debt and to focus more on fiber and their 5G network.
At first, investors did not like the news.
One fallout about selling a subsidiary like Warner Brothers worth so much money is that your revenue growth will take a hit. This in turn depletes the cash flow made. Ultimately, the business decisions going forward will be tougher to make and will only be scrutinized more.
Shortly after the spinoff was announced, AT&T CEO John Stankey said that they would have to cut the dividend to reflect the change in cash flow. A dividend is a payment to investors for their share of the earnings as owners of the business. This was shocking news to some as many investors relied on the generous payment for retirement living.
However, investors that stayed invested are still enjoying over a 6% dividend as of September 2022. This is a high yield for any sector in equity investments.
Additionally, AT&T has around 135 billion dollars of equity on its balance sheet as of 2022. This represents the company’s book value. The book value of a company can be measured by adding up all assets and subtracting liabilities. This number represents what a company is worth in the books hence the name.
This value is significant because the current market price of AT&T at the time of this writing is below book value. To some, this company is looking cheap and could be a buy.
Overview:
After studying some influential investors over the years, I have noticed a couple items that define a great company.
The company must:
- Have some return on invested capital
- This would mean that the business generates some sort of return and has income. You can also use ROIC to measure how a company is growing or not.
- The company needs to have made a lasting impression
- What would the world look like without them?
- They need to have done this for a long time.
- Can the business be run by several different people which means they have some sort of competitive advantage.
With AT&T, the business meets all three requirements.
According to Morningstar.com, AT&T has a ROIC in the mid to high single digits. Considering this and the billions of dollars invested in fiber and 5G recently, AT&T in planning for the future.
When thinking about the company’s business contribution, AT&T has given businesses the opportunity to strengthen their ability to connect whenever and wherever. It is fair to say that this has made a major impact on business overall in this country.
Last but not least, as we have already stated, AT&T stretches its roots back to Alexander Graham Bell. Not only have they been in business for a long time, but what better way to say you’ve made an impact than mentioning your founder was the inventor of the telephone.
Nonetheless, AT&T has great fundamentals. They have a good balance sheet regardless of the debt. Analysts are forecasting about 15 billion in free cash flow this year (2022). This, along with a great business model, shouldn’t worry investors about anything in the short term. If management can invest earnings properly and lessen the debt burden, AT&T will continue to be a major factor in the cellular network sector.
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