Although not back to full strength yet, AT&T (NYSE: T) has been making solid gains since the HBO Max launch. The COVID-19 pandemic pushed AT&T stock to lows not seen for more than half a decade. As AT&T continues to recover and build out its new streaming service, the picture looks very bright.
AT&T has always ranked high on Wall Street’s list of dividend aristocrats, and the dip in price only seemed to give more credence to the dividend. Further, AT&T’s restructuring of its debt has given the company ample growth opportunities and an added cash padding should anything go wrong.
The coronavirus pandemic forced many companies to change their models to adapt to the “new normal.” Luckily for AT&T, the new streaming service was already in the works and will find a ready audience of people stuck at home who want on-demand premium shows. It also addresses the problem of consumers getting rid of cable TV and cord cutting.
Last month, AT&T outlined plans to improve its financial position. During the pandemic, many investors have rushed to companies with strong balance sheets and rock solid dividends. While AT&T has a relatively strong balance sheet, it still can be improved and that’s just what management is doing.
The company plans to de-risk its capital structure by extending its debt maturities at historically low coupon rates. What this means is that AT&T is taking on new debt with a very low interest rate in order to pay off other debt. Ultimately, this is not a bad plan and AT&T is actually saving some good money off of it.
In terms of the specifics, AT&T closed the sale of €3 billion of its Global Notes due in 2028, 2032 and 2038. At the same time, the telecom giant announced that it has settled the combined principal of $12.5 billion of its Global Notes due 2027, 2031, 2041, 2051 and 2060. The total of these issuances is worth roughly $15.8 billion.
The net proceeds from the sale of these issuances will be used to prepay upcoming debt maturities. AT&T is redeeming in full all of the outstanding principal of six series of bonds totaling about $8.6 billion and term loans totaling $6.3 billion. The combined principal of these prepayments totals $14.9 billion.
AT&T management mentioned in its first-quarter report that it was taking steps to improve the company’s credit structure. Ultimately, these transactions are consistent with the goal of “improving its credit quality even as it remains committed to paying a dividend to its shareholders and investing in its growth areas.”
Looking at the 2020 full year, management expects that the dividend payout ratio from free cash flow will be in the 60% range and is targeting the low end of that range. Ultimately, this gives AT&T the flexibility to continue to reduce its debt for the time being.
There are a couple of methods for returning capital to shareholders. The first is paying dividends to loyal shareholders. Second, the company can buy back shares and directly give shareholders cash for them. AT&T took both of these approaches.
The telecom industry has historically paid some of the highest dividends in all of the stock market. AT&T and Verizon Communications (NYSE: VZ) have been at the forefront of this.
The market crash caused investors to reassess the balance sheets of many top companies and whether they would be capable of paying dividends. AT&T was a name that kept coming up in this debate. It has taken steps to ensure its financial stability and dividend.
In April, the company noted a relatively strong financial position and it has only improved since then with these more recent actions. On the books, AT&T said that it had roughly $9.96 billion in cash and cash equivalents at the end of the first quarter. At the same time, the company generated $8.9 billion in cash from operations and $3.9 billion in free cash flow.
When the markets bottomed in March, AT&T looked to return capital to shareholders via a $4 billion share buyback plan. This plan has since been canceled and AT&T is focusing more on its dividend.
Currently, AT&T pays its common shareholders a 6.3% dividend yield, which is significantly higher than many companies in telecom, communications and media.
The HBO Max service launched May 27 with the entire library of HBO shows and movies, as well as other licensed hit shows and exclusive originals. The service costs $15 a month ($12 if customers signed up before the May 27 launch date).
While there is a lot of competition in the online streaming space, there are a few differentiating factors between all these services, namely price and contend. With all of the premium content of HBO and more, it makes sense that AT&T would charge the highest out of the group.
In comparison, consumers are paying roughly $7 a month for the Walt Disney Company’s (NYSE: DIS) Disney+ (even more if they pursue the Hulu/ESPN+ Bundle) and $9 a month for the cheapest tier of Netflix. Apple TV+ costs about $5 per month, and Amazon Prime Video as a standalone service costs $9 per month.
In terms of the content, HBO Max will include non-HBO produced shows like “Friends,” “South Park,” “Rick & Morty,” and “The Big Bang Theory” — all of which are incredibly popular. HBO shows in the mix will include “Game of Thrones,” “The Sopranos,” and even “Silicon Valley.” With all of these premium shows, the price starts to make more sense.
Outside of these ringers, the HBO Max service has six “Max Originals.” A further 11 shows are scheduled to launch over the summer. The company’s goal was to have 31 originals in the first year and then ramp up to 50 in the second. However, the coronavirus has put a damper on production and supply chains, even in Hollywood, are constrained.
With financials in line, no concerns for dividends, and a premium streaming service rolling out, AT&T stock is making a very strong case for itself.