In the last 12-months, there have been dozens of stocks that have provided multi-fold returns. At the same time, there have been underperformers in the bull market. AT&T (NYSE:T) stock is among the top names in the list of stocks that have remained depressed.
Even setting aside its company-specific developments, there are several reasons to consider buying T stock. The broad markets are trading at a cyclically adjusted price-earnings-ratio of 37.9, making the company’s stock look attractive at a forward P/E of 8.6. Its downside risk appears to be minimal, and there is a good chance that it can rebound meaningfully.
Furthermore, T stock has a beta of 0.75, meaning that it’s not volatile. It makes sense to hold some low-beta stocks, given the market’s current valuations. I would not think twice before buying the stock.
AT&T disappointed many shareholders by announcing that its quarterly dividends would be cut by half after the spinoff of its media assets. However, I believe that this negative is likely to be offset by the value that will be unlocked by the spinoff. At the same time, as the leaner AT&T grows, it will probably raise its dividend in the long-term.
Let’s look at the specific factors that can serve as positive catalysts for the stock.
The Spinoff of AT&T’s Media Assets
In May 2021, it was reported that AT&T was planning to spin off its media assets and merge them with Discovery (NASDAQ:DISCA). There was speculation that AT&T’s media business would be valued at over $50 billion in the merger.
It was soon confirmed that the deal would take place, with AT&T’s media business being valued at $43 billion. AT&T’s shareholders will be receiving 71% of the stock of the new company. The deal is likely to be closed by mid-2022.
I believe that the spinoff will create value for the owners of T stock in the medium-to- long-term. In the wake of the deal, AT&T is likely to be a leaner organization that is completely focused on its wireless and fiber units.
It’s also worth noting that HBO Max and HBO reported a total of 67.5 million subscribers as of the end of last quarter. HBO Max expects to have 70 million-73 million subscribers at the end of the year.
Given the streaming assets’ sustained subscriber growth and the impending merger of AT&T’s Warner Media with Discovery, new Discovery’s outlook seems positive. Indeed, Discovery CEO David Zaslav is targeting 400 million streaming subscribers across the world for the combined entity.
As of the end of Q2, Netflix (NASDAQ:NFLX) reported 209.18 million global subscribers and a market capitalization of $229 billion. AT&T has a current market capitalization of just under $200 billion. Clearly, there is room for value creation if post-spinoff Discovery reaches its target of 400 million global users.
The Healthy Growth of AT&T’s Communications Units
AT&T’s postpaid mobile subscriber base grew at a healthy rate in Q2. For the quarter, the company reported a net addition of 789,000 subscribers. The company’s fiber subscriber base increased by 246,000, reaching 5.4 million.
Several factors boosted AT&T’s subscriber totals. First and foremost, the company is benefiting from strong demand for 5G services. Furthermore, with more people working from home, the demand for faster services has risen.
With these trends likely to continue over the long-term, AT&T is well-positioned to benefit from them in the coming years. It’s worth noting that the conglomerate’s mobility segment reported Q2 EBITDA of $8.0 billion and an EBITDA margin of 42.4%. The segment is the conglomerate’s main cash flow engine.
As AT&T’s communications business continues to grow, the firm is likely to have ample funds to both make investments and pay a high dividend.
The Bottom Line on T Stock
AT&T is likely to become a leaner organization in the next 12-24 months. This change will help it sustain its positive momentum in the telecommunications sector.
T stock has remained depressed, but it seems that the worst is behind it. Its business continues to generate healthy cash flows, and it has plenty of funds to invest in 5G infrastructure. At the same time, the new Discovery will be well-positioned to benefit from its global growth.
Considering these factors, it’s a good time to accumulate T stock. Once the spinoff is completed, the shares will be well-positioned to rally.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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