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AT&T (T) is one of the most followed and talked about stocks on Seeking Alpha, and also a leading stock for ownership in America. Yes, the dividend yield is quite high and appetizing in 2020. However, slow growth and mountains of debt argue for caution. The T-Mobile (TMUS) merger with Sprint this year has reportedly moved AT&T wireless subscription numbers into a third-place position. And, if the current recession lasts longer than expected into 2021, increasing competition may not mix well with wireless users looking to cut expenses on the home and business cost front.
Yes, AT&T also owns satellite TV, a full-range of media, legacy landline, fiber optic and broadband assets in the form of a conglomerate setup. Each is facing serious competitive and profit margin pressures individually during 2020. Communication related revenue for fiscal 2019 represented 77% of the company’s total. Wireless specifically was responsible for 40% of revenues and a lopsided 55% of company operating profit.
Overall, the stock quote has been fading the last several months, and a big price breakdown looks to be in the cards soon. You can review below the lagging total return performance, including dividends, of AT&T vs. main competitors T-Mobile and Verizon (VZ), plus the S&P 500 index gain over the last one and three-year periods.
I wrote a bearish article on Ma Bell in 2017, when the stock quote was $39, describing the huge overvaluation of the company on Wall Street after the Time Warner acquisition was completed. I earned a few dollars shorting AT&T in 2017. However, holding the position long term, with such a high dividend yield to cover on borrowed shares, has not been a markedly profitable standalone idea. Mind you, a short position in AT&T paired against better performing longs in a portfolio has continued to be a productive idea. Today’s $29 price, and $2 dividend payout over three years has not netted any real gain from the middle of 2017.
Image Source: Company Website
Technical Momentum Turning Down
I have not held any long or short position in the stock since the end of 2017, until lately. I have been reading the tea leaves during the summer, and now anticipate AT&T is setting up for another leg lower in price. The stock could easily decline toward multi-year low territory under $26. Tremendous underperformance of the U.S. equity market since the March pandemic low is the first warning sign. Other technical signals have been lining up in August and September to push the stock’s momentum ranking, using my Victory Formation sort, into the bottom 10% of S&P 500 equities.
Further, a reading under 10 on the 14-day Average Directional Index [ADX], a measurement of intermediate-term price trend direction, is telegraphing a total lack of buying conviction. Sub-10 scores have only been reached two other instances the last 20 years, in 2005 and 2013. Both of the previous low scores also saw lagging performance from the Accumulation/Distribution Line [ADL] and On Balance Volume [OBV] creations. You can review the two charts below. (Price has been adjusted for dividends over the years.) I have circled the below 10 ADX numbers in green. Over the following 3-6 months, notice AT&T’s stock quote struggled to rise.
Believe it or not, the ADX score almost reached 10 in February just before the coronavirus swoon. Below you can contrast today’s situation with the 2005 and 2013 circumstances. This summer’s long stretch under 10 and the early 2020 occurrence are circled in green again.
Also notice the steady uptrends in the ADL and OBV lines were broken in March-April, and have never really recovered. ADL tracks intraday buying/selling as a function of the daily close vs. the high and low prints each session. OBV is a simple review of daily price change multiplied by volume. Both indicators give clues of underlying price trend health.
Incredibly, AT&T’s price level is underneath both the simple 50-day and 200-day moving averages. In contrast to the super-strong rally in the general stock market into early September, less than 25% of U.S. stocks are trading under the two averages in combination today, according to data from Barchart. I am quite confident a price breakdown below the $28-29 zone will be problematic for bulls, and could cause many Wall Street professionals to begin a period of mass liquidation, stop loss selling if you will.
Too Much Debt
What is holding back AT&T? Namely two variables that, in combination, almost always spell trouble for a company’s worth – debt and competition. If you want a single data point for the stock’s rotten performance over the years, it is the stupendous debt position.
The Time Warner deal in 2017 moved AT&T’s finances into an almost insurmountable leverage headwind. At the time of the deal’s completion, the stock ranked #4 for company worth against net tangible book value (equity capitalization + necessary capital to bring a zero reading to tangible book value) out of all U.S stocks. To get total debt into a more manageable position the company has sold assets and shrunk the company’s size for several years (the opposite of growth). However, using the current $29 stock price, AT&T still sells for $330 billion more than net tangible book value (which is significantly negative), a Top 10 spot on Wall Street for overvaluation against physical assets. Below are charts of net debt issuance, total debt and capital leases, and total interest expense vs. each of the major wireless carriers the last five years.
The bad news for AT&T shareholders is the debt problem has only marginally improved since 2017, leaving the company open to competitive pricing pressures and falling demand during a recession. Below are charts of the still expansive negative tangible book value issue, alongside financial leverage vs. EBITDA calculations.
High Dividend Payout Impeding Business Growth
I know bulls have placed their hopes for the company on 5G wireless technology development, but the T-Mobile/Sprint hookup and Verizon efforts in 5G are quite formidable also. At this point, the huge suction sound investors hear is the common dividend payment hogging most all the cash flow generated by the business. Forget necessary capital investments, earnings and cash flow are used almost entirely to pay enormous debt/interest bills every month and the common cash distribution. Below is a chart of the payout situation as a percentage of income.
T-Mobile does not pay a dividend, and is funneling billions into company growth. Serious competitive problems for both AT&T and Verizon appear to be on the horizon. Already, most analysts rate T-Mobile’s 5G network as best-in-breed because of its size and availability nationally running circles around everyone else. If the newcomer can dramatically undercut both of the legacy Bell companies on price sustainably, AT&T’s stock quote will find itself in an uphill battle requiring more investment capital or a huge drop in cash flow to maintain consumer demand. At that point, the dividend will be slashed, dilutive equity issuance may become necessary and/or the company might be forced to break apart, with major operating segments divested.
Don’t take my word for it. Wall Street analysts see the profit and sales squeeze as an intractable problem over time. On one side of the vice is higher than necessary operating expense caused by the monster debt position. On the other side of the squeeze play is its high dividend payout crowding out beneficial uses of cash flow. The opportunities to reduce debt or invest in the business to grow out of the leverage mess just do not exist. Below is a comparison of projected EPS results the next few years. AT&T is expected to see a slow fade in profitability.
Finally, net profit margin and return on assets are sliding and lower than the industry. The charts below do a good job of highlighting the debt straitjacket AT&T has tied for itself.
I rate the stock an Avoid or Sell today. I shorted shares in early September in my diversified long/short portfolio, basically as a hedge against better-positioned long selections in other industries. I expect the stock to continue underperforming the S&P 500 index in coming quarters. And, if the economy fails to rebound in 2021, lower sales and income could quickly lead to debt rating downgrades, higher interest expense over time, and even a large common dividend cut.
I think picking a price target is difficult in today’s overvalued market environment, but a whole lot lower is possible. AT&T’s debt problem and management overconfidence (about execution and future growth) are similar to the General Electric (GE) experience of three years ago. Back then I warned investors in a series of articles, GE’s glory days had past, and enormous downside was possible. The stock price has declined from $30 a share to $6 today, and its once high dividend payment has been slashed to 4 cents annually. Don’t say the same cannot happen to AT&T. It faces bigger competitive issues, has greater debt levels, and investors are counting on the dividend yield like few other corporations in Wall Street history.
Sounds like a recipe for investment vehicle disaster to me. You are free to disagree. I am sure many will argue cash flow is increasing, debt is falling, the economy will rebound strongly, and make other points, all true and accurate. The problem is things change, and that’s the only constant in nature and free markets. Overconfidence in management, ignoring the horrible debt math, turning a blind eye to competition, and believing U.S. blue-chips are somehow bulletproof are all ingredients of the bullish argument in AT&T today. I will take the other side of that trade.
Investors should understand that shorting involves greater risk than a regular long approach to investing. You can lose more than you invest initially, if good news propels a stock higher unexpectedly. I suggest shorting a large number of individual stocks with your capital, only as a hedge against your investments on the long side. Small short positions and a net-neutral to somewhat net-long portfolio design overall will keep bearish short-sale picks from ruining your day, when one or more invariably outperform the market
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is suggested before making any trade.
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Disclosure: I am/we are short T. 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.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.