Hi I'm Jimmy and this video
we're going to walk through AT&T
stock ticker symbol T.
Now many of us dividend investors
really like AT&T stock
because it pays a great dividend.
Right now it's got a dividend yield
of about five and a half percent.
And the stock is trading for about
thirty seven dollars a share in this
video. We're going to look at where
we think AT&T stock could go.
Do we think that the dividend is
safe and
what could go wrong.
OK. So let's start with what has
made AT&T stock so interesting
lately. So would our money
management company name Elliott
Management took a stake worth
about three three and a half billion
dollars in AT&T stock.
We know that because in early
September Elliott Management sent
AT&T as management a letter
outlining some suggestions
that they have mapping out a plan
that they think will make AT&T stock
worth more than 60 dollars per share
while also securing
their fantastic cash dividend.
Also they want to do some cash
buybacks.
They have a pretty good plan for
them. So this is a five year chart
of AT&T stock sixty dollars
a share would be way up here.
So that's about 60 percent
higher than the current level for
AT&T stock.
So here are the basics of the plan.
And by the way if you're curious to
see a copy of the whole letter I've
got a link in the description below.
And it's actually quite an
interesting read it's about twenty
twenty three pages or so.
So it's interesting if you're
curious about that.
But basically they had four or five
suggestions that they mapped out
in depth.
But to summarize those suggestions
first they had sell non
core assets.
Now we'll dive more to some of these
after we run to the basics and what
it could mean for AT&T stock.
OK. Next up improve operations.
Now they're they're talking about
mostly making operations
a bit more efficient and reducing
operational expenses.
Then they say focus on capital
discipline.
This is a big one.
I come back to this one in a second.
And this is right in line with AT&T
assets it's right in line with that
whole thing. And then they have
lower debt levels.
And then finally increase oversight
of management.
OK. So of these five
items I think they're all great
suggestions for AT&T and
they're really good for any company
for them but for AT&T
I believe that some of these are
very very important.
Let's take a quick look at their
debt as an example.
So this is a chart of 18 times long
term debt going back to 2004.
And as we could see we had a few big
jumps first in 2015.
That's what AT&T bought Direct TV
and then there was another big jump
last year when 2018
when AT&T buy Time Warner.
And as we could see they now have
over 160 billion dollars of
long term debt.
So that's a ton of debt for any
company be sitting on.
So we go back to our improvements
list. Well clearly improving
the debt right here.
That would be a great thing for the
stock. But AT&T
is debt is also addressed with this
point here.
So AT&T has taking
on a ton of debt to acquire
new companies that may
not be worth their cost.
And this brings us to the Direct TV
acquisition.
So Direct TV has lost subscribers
for AT&T for 10 consecutive
quarters.
Now they've also launched
direct TV now which they renamed
to AT&T now but
they're not doing that much for the
company at least not doing as much
as they thought that they would.
And don't forget they spent about 48
billion dollars on Direct TV.
So the question floating around is
should AT&T sell Direct
TV. One obvious buyer
but these the other large satellite
company and that's Dish Network
and AT&T wouldn't even have to sell
the whole company.
In theory they could sell a piece of
let's say they sold 60 percent or
even 51 percent and
they can still participate in the
upside.
But you push off the responsibility
of running the day to day operations
to Dish Network.
So this is one of those things that
Elliott Management stressed AT&T
needs to stop going out and
making these enormous purchases
that are frankly somewhat difficult
to combine with their car business.
It's not like AT&T is doing it
Warren Buffet style where they go
out by a company and then
let the business act independently
with the backing of a much larger
organization behind it.
No they're trying to mix their
business right into AT&T
whose current business and a good
example of this is direct TV
when they completed the DIRECTV
acquisition. Nearly all of
directives management team left
the business.
Now AT&T is stuck feeling figuring
out what to do with the 30000
or so employees that Direct TV had
and clearly they haven't done
as good of a job as they could have
done. So if AT&T would have stopped
these acquisitions and start using
their free cash flow to pay down
debt while also maintaining
their dividend well what would that
do to AT&T stock.
So this is a chart of AT&T
is free cash flow.
And as we can see it's been a bit
volatile.
But when we add
the cash that they paid for
dividends each year we can see that.
Broadly speaking they seem to
have been able to cover their cash
dividends with their free cash
flow and we can't forget that for
about 35 years AT&T
has increased their dividend every
year. This is a chart of 18
is dividend on a quarterly basis
going back to 2010.
And obviously they've been quite
consistent with the amount that they
pay up.
So this is great and hopefully
management goes ahead and listens to
listens to Elliott Management
with their business and maybe their
stock price really ends up at 60
dollars per share.
But how could this stock be worth
sixty dollars per share or
let's pretend that they do go ahead
and they listen to Elliott.
Or maybe they don't or more likely
they only listen to part of what
Elliott suggests.
Either way what do we think that
AT&T stock is worth today
given its current trajectory.
And what if they do listen.
And what if they don't listen.
What is the stock worth.
Well using a discounted cash flow
valuation method it seems
that given the current conservative
free cash flow projections
I think it's possible for AT&T stock
to be worth that in the 60
dollar range.
So here's how we did this
calculation.
And if you're curious I've got a
whole video on how to calculate
this. I've got a template that I
built and I can email that to you if
you're interested.
There's a link in the description
below. In your email address Oh you
know it all to you but basically
what we do is we take the
projections for free cash flow
and then we discounted that by the
required rate of return of about
eight and a half percent.
That's about my standard required
rate of return although I've used
higher and I've used lower depending
on the situation.
The how do we use for that.
The lower the fair value of the
stock would be.
So in theory the higher the required
rate return the more conservative
the estimates then I use the
perpetual growth rate of two and a
half percent and we divide that
result by the shares
outstanding and we get an estimated
fair value of about sixty three
dollars per share.
Now this says fair value of equity
and that's actually not correct.
That should really set a fair value
of the company because what
this is missing is
the at least some sort of
recognition of AT&T is enormous
debt load many times
if the debt is at a reasonable
level. We can just stop here we can
just calculate the value of the
entire company both debt and equity.
So we don't need to account for debt
but in this case they have so much
debt. It's really important for just
looking at the equity
which is AT&T stock we're just
looking at that we need to account
for that debt.
So here we want to add AT&T is
net debt.
So we take the 450 nine
we subtract the one one
in net debt and we get a value of
the equity of about 288.
Well we then divide that by the
shares outstanding same shares
outstanding as before we get a fair
value of the stock of about thirty
nine dollars per share.
And this actually makes a lot of
sense because right now AT&T
stock is trading at about
thirty seven dollars per share so
it's right in this area.
Now what I did here with these two
numbers at the bottom is
I really took the two extremes in
one scenario all of their debt
is in play they keep it all and
they barely increased our free cash
flow. And in that scenario the stock
would be about thirty nine dollars
per share.
So a little bit of upside
flip side they pay off all of their
debt for some reason free cash flow
it doesn't go up which it really
should because profits would be
larger in theory free cash flow
should go up.
But being conservative they pay
off all their debt keep the same
free cash flow numbers and then the
stock is worth over 60 dollars per
share but obviously there's a whole
bunch of possibilities in between
these two.
They could sell direct TV or piece
of Direct TV and pay off some of
that debt or they could improve
their operational efficiency and
increase free cash flow at a faster
pace or they
could go out and do something crazy
and make another huge acquisition
and that would be a negative thing
for them. Unless of course the
acquisition outweighs it.
But either way it introduces a new
risk to this whole thing.
But personally I think it's more
likely that this will land
somewhere in the middle of this
having an activist investor like
Elliott Management sitting over
AT&T as management's shoulder sort
of peering at what they're doing
could be a very powerful thing.
And I think this is a good thing.
At the end of the day for AT&T stock
which by the way has way
underperformed both Horizon
and the stock market over the past
few years.
So maybe in the next few years this
could be a positive thing for AT&T
and they'll get a shot to outperform
the group.
But what do you think.
Do you think that AT&T stock is
a good buy at this current level
given Elliott's involvement
in this whole thing.
Please let me know what you think of
the comments below.
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Thank you for stick with me all the
way into the video if you're
interested in seeing any of the
other videos. I've got links below.
Got that. Spread the excel template
if you're curious.
Links below.
Thanks. I'll see in the next video.