This has been an interesting environment for telecom and cable stocks with bullish factors like low-interest rates, revenues that remained stable during the pandemic, and increased demand with more people working from home. But other bearish forces were acting on the stock such as people disconnecting from cable and satellite TV in favor of streaming content.
One of the biggest lagging stocks in the group is AT&T (NYSE: T) which is only up 5.7%, while the S&P 500 (NYSE: SPY) is up 102%. In fact, the stock is down nearly 40% from its peak in 2016. This means that AT&T underperformed bonds and stocks over that timeframe. This is certainly unfortunate as the stock is owned in many retirement accounts due to its size, name, and high dividend yield.
Currently, it pays a 7.6% yield, however, many expect this to be slashed in the coming months. In addition to this, the company is also pivoting away from many of its recent decisions over the past decade to diversify, invest in its own original content, and build out a satellite TV business. Therefore, the company is spinning out WarnerMedia which includes HBO. It also is taking a total loss on its acquisition of DirectTV.
AT&T got into satellite TV at the worst time. People are cutting TV service and not signing up for new plans due to the growth and availability of streaming content. At the same time, many of the premium features and channels that were only available on satellite TV are now available through streaming and cable which undercut one of the main reasons to get it. The most notable example is the NFL package and Redzone channel.
As AT&T took a write-off for these bad investments, its earnings went negative, so metrics like free cash flow or operating margins may be a better indicator of its health. Here, the picture is better as free cash flow has risen 25% while the stock price is down 40%. Earnings are expected to rebound next year as analysts expect $3.22 in EPS giving it a P/E of 8.
However, one headwind could be the 10Y yield which should rise if case counts keep declining and the economy reaches normal. Therefore, better opportunities may emerge in the stock especially in terms of valuation.