For such a long time, I would scan my portfolio for something to get rid of -- this is something I do regularly in good times and in bad. I never like to hang on to stocks that don't perform for very long. Even if they just go sideways, as the shares of AT&T (T) have pretty much done since selling off in early 2020. Stocks that do not move do not only take up space, they present opportunity lost, as in the fact that cash might not perform, but at least cash is flexible. Cash is a strung arrow. Non-performing equities are no more than a slung bow.
Something had always stopped me from selling "Telephone", as that is the moniker traders had placed upon AT&T since long before I showed up. Hence the letter "T" stock symbol. What stopped me was that wonderful dividend, currently $2.08 a share annually for a yield of just under 7%. Not only did "they" always find a way to pay it when some of us had doubts, "they" always found a way to raise it. Who would sell such a stock, even if it was a dog.
This morning something changed. My hopes were not high. I also own Verizon (VZ) , and that stock offered no thrills the night prior. Granted, the two businesses are not truly apples to apples, they are both telecom at the core, they both pay that dividend and they both balance a lack of upward mobility versus a lack of perceived equity risk. This morning, I went from "Why do I own AT&T?" to "Wow, am I glad I own AT&T."
The First Quarter
For the first quarter, AT&T reported adjusted EPS of $0.86, which best expectations on revenue of $43.9 billion. The revenue print was good for year over year growth of 2.6% and also a sizable beat of what Wall Street was looking for. Actual GAAP EPS came to $1.04. The firm adjusted 18 cents downward to make earnings comparable to past periods as this adjustment contained an actuarial gain on benefit plans and merger amortization costs. I like when firms adjust downward. Maybe I'm an old fool, but to me it shows a level of honor that I am not sure is aspired to by each and every public corporation that graces our marketplace.
I guess after the twin disappointments offered up by Netflix (NFLX) in terms of subscriber growth as well as in expected subscriber growth, that the headline in AT&T's earnings release would be the growth in HBO Max, which managed to impress. HBO Max gained 2.7 million domestic subscribers, bringing the U.S. total up to 44.2 million subs. Global subscribers total 64 million. Total revenues for the WarnerMedia unit where HBO Max resides increased 9.8% to $8.5 billion, as ARPU (average revenue per user) for HBO Max domestic and HBO printed at $11.72.
As for the mobility business, there were 595K postpaid phone net adds, 823K postpaid net adds (huge number), and 207K prepaid phone net adds. The postpaid churn rate came to 0.76%, which was down 10 basis points. There were 235K Fiber net adds in Consumer Wireline, where IP broadband revenues gaped 4.6% higher on ARPU growth of 3.2%.
One note, you will not find performance for the video unit in this release. Video is now included in "Corporate and Other" as this business is now classified as "held for sale." Information is available on the company's Investor Relations website.
Lastly, but very importantly... free cash flow increased 51.1% from $3.9 billion to $5.894 billion, free cash flow after paying dividends improved from $163 million to $2.153 billion, more than a 1200% increase, as the free cash flow dividend payout ratio dropped from 95.8% to 63.5%. Quiet healthy, given that the share price was stable.
Looking Ahead
For the full year, the firm sees revenue growth of just about 1% on a comparative basis that will produce adjusted EPS in line with 2020. Gross capital investment is now looking to be in the $22 billion range with capital expenditures in the $17 billion area. This is expansion in 5G capability as well as investment in the streaming service. The firm expects free cash flow to land close to $26 billion, and to keep the dividend payout ratio close to the high 50%'s.
The Chart
I show you the more than one year basing pattern that appears to have just cracked to the upside for AT&T. The significance of trading above the $31 level that had offered resistance both back in June 2020 as well as in December.
Investors will see that an RS reading of 75 is not necessarily healthy, or should I say it might be "too healthy." This is why I expect the shares to, after the swing traders wash out, possibly pull back to the 21 day EMA which is rising. This, in my opinion, could be the last chance to add before the stock finally moves into its next technical phase. After all, there is a gap to be filled. After that, my target price is a very conservative, a very attainable $37. That will be the first bus stop. How far does the bus go? I don't know. If you heard CEO John Stankey this morning, he's not here to screw around. He's here to win. So am I.
