Corporate managements in the U.S. have taken the opportunity to play Santa Claus this holiday season as the Republican-controlled congress has passed the first meaningful tax reform in a generation. Wells Fargo (WFC) , Fifth Third (FITB) and others have announced wage increases for employees, and AT&T (T) pre-empted its blue-chip brethren with a Texas-sized gift of $1,000 each for 200,000 non-executive employees. T's CEO Randall Stephenson captured the zeitgeist succinctly with this quote in the company's press release:
Congress, working closely with the President, took a monumental step to bring taxes paid by U.S. businesses in line with the rest of the industrialized world.
So, The Tax Cut and Jobs Act is truly a transformational piece of legislation, and domestically-focused companies are obviously the big winners. But who should get those spoils? Aren't these companies owned by shareholders? Before the old men wearing monocles and sitting in overstuffed leather chairs drinking cognac get too testy, I should point out that in AT&T's case, anyway, shareholders have already been given their bonus.
On Dec. 15, AT&T announced an increase in its quarterly dividend rate to $0.50 per quarter, effective with the February payment (record date is January 10.) With T now sporting a 5.1% yield and having underperformed the S&P 500 by a massive 27 percentage points over the past 12 months, Real Money's editors tasked me with answering the question: Is AT&T an attractive value play in post-tax-reform Corporate America?
The answer is a qualified "yes," but the qualification is, again, the U.S. federal government. A quick look at AT&T's financials and recent management presentations at industry conferences, shows one key factor: AT&T really needs Time Warner (TWX) . The Department of Justice sued to block the AT&T-Time Warner merger on Nov. 20, and the last news item was a DOJ motion to block AT&T's request for a February 2018 court date on the merger. I just cannot handicap the chances of a consummated merger, but I can guarantee there will be plenty of news items -- fake or otherwise -- on this deal for the foreseeable future.
Without Time Warner, AT&T is a shrinking company, and dividend or no, that is not an appealing equity play. T's third-quarter revenue by division paint a clear picture:
--Mobility $17.4 billion in 3Q2017 vs. $18.2 billion in Q3 2016;
--Entertainment $12.6 billion vs. $12.7 billion;
--Business Solutions $17.1 billion vs. $17.8 billion.
So all three of AT&T's major business divisions contributed to the company's 2.9% overall decline in revenue in the third quarter. A slower pace of smartphone upgrades, residential cord-cutting and the decline in use of legacy wireline systems by enterprises are three trends that will continue to pressure AT&T's results in future quarters, in my opinion.
So, the answer is to add content. As we saw with Disney's (DIS) announced purchase of Fox's production assets, the scarcity of large-scale content providers makes those businesses extremely valuable. All those millennials have to be watching something while transfixed by their smartphones, even if they are hesitant to upgrade them.
Time Warner offers a three-legged content powerhouse, with Turner, HBO, and Warner Brothers. Turner offers the news (CNN) and sports (TBS, TNT) that are still important to live, non-OTT viewership, Warner Brothers is (assuming Disney-Fox closes) one of only four major, global movie studios and HBO is just flat-out killing it of late, with a 12% increase in subscription revenue in the third quarter.
So, that's the AT&T conundrum. The government just gave the company a huge bonus, but that same government could scotch the transformational transaction the company so desperately needs.
Gaming the M&A legal process is a very, very difficult task and I would leave that to the risk arbitrageurs of the world. If you just want AT&T for the dividend, that's fine, but remember, without Time Warner in the fold, T stock is a classic value trap. T shares have fallen 8.1% in the past 12 months, and without TimeWarner that sort of relative stock underperformance would likely be the rule, not the exception.