AT&T’s new-media revolution is off to a slow start on Wall Street.
One year ago, the Dallas telecom giant closed on its $100 billion-plus deal for Time Warner Inc., owner of HBO, CNN and Warner Bros. Since then, AT&T's stock price has languished while rivals surged.
Go back to October 2016, just before the deal became public, and the gap is even wider. While the market and competitors generated double-digit returns, AT&T shareholders are in the red over that two-and-a-half-year period — and that’s despite a rich dividend.
AT&T’s stock closed at $32.29 on Thursday, $7 lower than before announcing the Time Warner merger.
So what’s ailing AT&T’s stock?
Start with a huge debt load and a surge in new shares, which helped pay for Time Warner last year and for DirecTV in 2015. Those deals swelled the company's balance sheet and even prompted some credit downgrades.
In 2018, AT&T spent over $22 billion on interest and dividends, 62% more than the year before buying DirecTV.
Then there’s the question of whether AT&T can reinvent mobile entertainment, one of its goals in pursuing Time Warner and becoming a content creator as well as a distributor. To succeed, AT&T must go toe-to-toe with Netflix, Disney, Amazon and Google — all while maintaining the growth in its crucial wireless business.
The stock’s trajectory reveals plenty of skepticism.
"The market is saying, 'We're not confident you can generate the earnings to offset the dilution from all those deals,'" said Don Shelly, a finance professor at the Cox School of Business at Southern Methodist University. "This is a show-me stock right now."
Others used the term "show-me" to describe the challenge on Wall Street, including John Stephens, AT&T's chief financial officer.
“And we’ll continue to show 'em,” Stephens said in a phone interview Thursday.
He acknowledged investors’ concerns, especially about the debt load. But in his view, the biggest overhang on AT&T’s stock has been the uncertainty around Time Warner.
Delays matter
The Justice Department fought the deal, challenging a so-called vertical merger in court for the first time since the 1970s. That put everything in limbo until June 12, 2018, when a federal judge sided with AT&T and approved the combination without any conditions.
Two days later, AT&T closed the deal.
But the Justice Department appealed and the case wasn't resolved until late February. A panel of judges upheld the decision and the government opted to not appeal again.
The delays “had an impact on operations, on our ability to implement our strategy and on the market’s view of us,” Stephens said.
“The uncertainty of that transaction has been the biggest factor” in the lagging stock price, he added.
Since then, AT&T has reorganized its entertainment efforts, changing leadership and changing the name to WarnerMedia. It’s also been paying down debt aggressively.
AT&T is selling its stake in Hulu, a streaming service, and office space in New York’s Hudson Yards. Those are key pieces in a plan to raise $6 billion to $8 billion in asset sales this year. The proceeds will go toward debt.
With wireless service revenue growing 2.9% in the first quarter and WarnerMedia generating significant cash, AT&T’s free cash flow is surging. Much of that will go to reducing debt, too.
By the end of 2019, just 18 months after closing on Time Warner, AT&T said it plans to have paid off about three-quarters of the $40 billion borrowed to buy the media company.
AT&T is committed to cutting a key debt ratio, CEO Randall Stephenson told an investor conference last month.
“We’ve made a hard pivot to make sure that we addressed that situation and get it done this year,” he said.
Bond investors apparently approve. Since the end of the year, interest rates on AT&T bonds have improved by about 100 basis points, the company said. And Stephens believes that bodes well for other investors.
“If you look at our lower cost of debt, that means people have more faith, more confidence and more optimism about us,” Stephens said. “What has played out in the debt market should play out in the equity market. And if it does, we’ll have a higher stock price.”
AT&T shares have climbed since January, earning double-digit returns. That’s on par with the gains in the S&P 500 Index and T-Mobile over the period, and ahead of Verizon.
"They're not just talking about reducing debt; they're taking action," said Keith Snyder, an analyst for CFRA, an independent research firm.
Keeping up with Disney
Investors are still worried about AT&T competing with Walt Disney and Netflix, he said. Like WarnerMedia, Disney has a large catalog of premium films and shows, and it has a strong record of monetizing those assets with theme parks and merchandise sales.
Disney unveiled plans for a low-priced streaming service to compete with Netflix, and AT&T aims to introduce its own service in the fall. But with AT&T focused on paying debt and adding 5G service to more cities, will it be able to keep up with the entertainment leaders?
“AT&T seems to be starting two steps back,” Snyder said. “They’re moving forward so slowly that I’m worried they’re getting left behind.”
With the legal case ended, AT&T can move faster now. And it has another way to try to boost the stock price: buying back shares.
After paying down debt and generating more cash, that will become an enticing option, said CEO Stephenson.
“I got to be honest with you,” Stephenson told investors last month. “With [the] stock trading where it is, it’s time for us to begin to take some of that stock back in as well.”
