- By Ishan Majumdar
Telecom behemoth AT&T (NYSE:T) has recently been in the news for a better-than-expected quarterly result. The company managed to rope in a substantial base of subscribers in the past quarter, including strong additions to its fiber network and its media streaming services.
With its current level of dividend payouts, the stock is providing a yield of more than 7% and has become a very attractive bet for yield players. However, AT&T's struggles with respect to its entertainment segment are far from over, and whether the management will be able to sustain its massive dividend while pouring cash into the expansion of its 5G and streaming businesses remains to be seen.
AT&T managed to deliver a solid result for the third quarter of 2020, where it delivered a revenue beat and matched the analyst consensus estimates with respect to earnings.
The company reported a top-line of $42.3 billion, down from $44.6 billion in the corresponding quarter of 2019 but well above the analyst consensus estimate of $41.58 billion. The revenue growth was driven largely by 645,000 new subscribers added to its monthly phone plan. AT&T clearly managed to outperform its rival Verizon (NYSE:VZ) on this front too, as Verizon had added around 553,000 in the same period.
Source: Company Presentation - Q3 2020
The company also added 350,000 fiber broadband customers and generated a solid inflow from HBO and HBO Max subscription services. As a result, its earnings per share (EPS) of 76 cents were more or less on par with the analyst consensus estimate, though down from the Q3 2019 number, which was 94 cents.
The management expects to generate close to $26 billion in free cash flow by the end of 2020. which should be more than sufficient for continuing dividend payouts.
One of AT&T's problems comes from its entertainment business, i.e. WarnerMedia the DirecTV satellite TV business. The company lost close to 590,000 pay-TV subscribers, most of which were a part of its DirecTV satellite business. Over and above this, the company also lost 37,000 internet video subscribers, and its television advertising was hit hard. Despite the release of Tenet, Warner Bros' revenues also plunged 28% to $2.4 billion and the only relief for this segment came in the form of the return of sporting action, particularly NBA games.
AT&T's entertainment strategy has been erratic as the company launched a number of different streaming services in one go and was eventually forced to start discontinuing the redundant ones while focussing on the growth of AT&T TV Now, a group of live channels, and HBO Max, the company's internal content from HBO and Time Warner's productions.
With time, this streaming space has become extremely crowded with industry leaders having a huge spending power to compete with and challenge AT&T. While AT&T's growth of HBO and HBO Max subscriptions from 36.3 million to 38 million in the U.S. was impressive, it is worth highlighting that the company is lagging behind many industry giants who also have massive spending power. AT&T's total global subscriber base of 57 million lags way behind industry leader Netflix (NASDAQ:NFLX), which is nearing 200 million subscribers, and even Disney (NYSE:DIS), which recently crossed 100 million. Comcast's (CMCSA) Peacock is also building itself to become a formidable future rival and has already crossed 15 million subscriptions.
AT&T's services are already having a premium pricing at $15 per month, above almost all its peers. It is possible that the company may have to cut down this price to attract more subscriptions and also increase their spending in this struggling entertainment segment. AT&T has already invested $600 million in HBO Max in Q3 2020, with a total investment of $1.3 billion in 2020 and a planned outlay of $2 billion for 2020. It might have to up this expenditure over the years in order to stay competitive with the larger players.
Fiber and 5G businesses
AT&T has been doing well in the fiber segment where it added around 350,000 new customers and the management has plans to keep growing the broadband business. They already have a footprint of over 14 million fiber homes and will look to grow it further.
However, on the 5G front, the company has its fair share of struggles lining up with T-Mobile (NASDAQ:TMUS) posing as a significant threat over and above Verizon. After the $30 billion merger with Sprint, T-Mobile has surpassed AT&T to become the second-largest wireless carrier in the U.S. after Verizon with 98.3 million subscribers. T-Mobile has also been very aggressive on the 5G front and is operating the largest 5G network in the U.S. covering over 250 million people spread across the country. Its 600 MHz low-band spectrum is known to be more effective than the high-band mmWave spectrums used by AT&T and Verizon and could possibly generate better speeds. Thus, AT&T could lag behind its competitors in the line up to aggressively push 5G devices like Apple's (NASDAQ:AAPL) new iPhone 12 into the market.
AT&T witnessed a small spike after the strong earnings result, but the overall performance of the stock over the past two quarters has been weak, showing a drop of 9%. This has made the company's dividend yield very attractive at 7.48%, significantly above Verizon, whose management is also following a similar policy of large dividend payouts despite high debt levels.
AT&T has growth potential both with respect to 5G as well as its media segment. However, it does face strong competition in both these business and will need to spend wisely in order to beat competitors.
Disclosure: No positions.
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This article first appeared on GuruFocus.