AT&T (T) put the firm's fourth quarter performance to the tape on Wednesday morning. There was enough to like. There was also enough to dislike. Then there was the "stuff" that makes one stop and say "whoa". For the reporting period, AT&T reported adjusted EPS of $0.75, which beat the street by two cents, which is badly misleading. Using generally accepted accounting principles (GAAP), the firm posted EPS of $-1.95, and that number missed the street's expectations by more than $2.40. I will explain this gap between what one sees in the mirror and one's actual appearance in a minute. Revenue generation landed at $45.7 billion for the quarter. This number did beat consensus view, but also amounts to year over year sales "growth" of -2.4%, the firm's sixth consecutive quarter of contracting year over year revenue totals.
Here Now, The News
We'll start out with what we like, besides the 7% dividend yield, which I believe is sustainable as the free cash flow does seem to be there. Let's face it, if AT&T ever needed to cut the $2.08 annual dividend in half, even if the shares did not sell off in response (they would), this would still be a "dividend name". Okay... so we like some of the action on the telecom side. Mobility driven revenue grew 8% mostly on 28% growth in equipment sales. The firm posted a net add of 800K postpaid phone customers, and just short of six million total domestic wireless adds. Postpaid churn was just 0.76%, one the lowest numbers for churn ever posted by this firm. In addition, broadband posted 273K fiber net adds.
Oh, one more thing, HBO/HBO Max is doing quite well, partially driven by "Wonder Woman 1984". HBO Max has now reached 41.5 million domestic subscribers, and more than 60 million globally. Activations doubled during the quarter, and the firm seems to be well ahead of schedule on growing this business, which is where the entertainment side of the business is going to focus. All of this news seems pretty decent. Now sit down, we're about to do "awful".
Here is where I address the massive gap between actual and adjusted performance. Remember DirecTV? I hear some folks still use the service. Well, for the fourth quarter, AT&T booked a $15.5 billion (with a B) charge (more than 1/3 of quarterly revenue generated) on the pay-TV business. Directly responsible for this would be cord-cutting, which has accelerated greatly as the pandemic has brought about rapid change in how homebound consumers entertain themselves. The charge leaves AT&T with a Q4 net loss of $13.89 billion. In addition Warner Media saw revenues decrease 9.5% to $8.9 billion, advertising has been weak, and the box office is what it is. Even in places where there are open movie theaters, it is hard to imagine much in the way of demand. Video (which includes DirecTV and U-verse) lost a net 617 subscribers for the quarter, while over the full year domestic connections fell from 20.4 million to 17.2 million.
Salt in the Wound
In addition to the massive charge against quarterly revenue, and separate from the earnings release... AT&T has apparently become the subject of a $1.35 billion lawsuit brought by Network Apps of Seattle, accusing AT&T of basically stealing its device synchronization technology following what had been a joint venture between the two companies.
Why am I Long This Name?
Why am I long Verizon (VZ) ? Why am I long AT&T? The truth is that both have been on my book a long time. They started out as part of my 5G technology play. There is no doubt that as a 5G technology play from the perspective of a telecom provider, that T-Mobile (TMUS) would have been a far better investment. T-Mobile is up 67% since the last day of 2019. AT&T is now 23% lower since then, while VZ is about 8% lower.
Now these are dividend stocks. TMUS, the better investment over the past year, pays no dividend. I have already told you that AT&T pays 7%. VZ pays 4.4%. Neither is enough to overcome the capital loss over the past almost 13 months, but that was then, this is now. With markets acting a little funky at the top of the chart, and cyclicals showing signs of weakness going into the most dangerous month, not only of the market's calendar year, but also in the newly inaugurated presidential cycle (from a market perspective). That said, in my opinion... this ain't the time to sell two of my better dividend payers.
The fact is that as a trader, it is incumbent upon us to manage risk. You can sell covered calls against your longs. The only risk there is opportunity risk. You can also add to longs intelligently. I told you how AT&T and VZ have performed over the past almost 13 months. With VZ down 8%, my position is +9.3%. With AT&T down 23%, my position is down 0.7%. Know your tools. Manage your risk. Quite obviously, watching today's news, there are extremely well-paid professionals who think of themselves as home run hitters. They have forgotten how to get on base, how to hit and run, how to keep themselves in the game when the game gets hard. My price target for the letter "T" is $38. I do not support the idea of, or will I myself.. sell AT&T here in the high $20's. The $26 level is important as that spot had acted as support twice in 2020.
