AT&T Stock Analysis – Could AT&T’s Stock Really be Worth $60 a Share?

Hi I’m Jimmy and this video we’re going to walk through AT&T stock ticker symbol T. Now many of us dividend investors really like AT&T stock because it pays a great dividend. Right now it’s got a dividend yield of about five and a half percent. And the stock is trading for about thirty seven dollars a share in this video. We’re going to look at where we think AT&T stock could go. Do we think that the dividend is safe and what could go wrong. OK. So let’s start with what has made AT&T stock so interesting lately. So would our money management company name Elliott Management took a stake worth about three three and a half billion dollars in AT&T stock. We know that because in early September Elliott Management sent AT&T as management a letter outlining some suggestions that they have mapping out a plan that they think will make AT&T stock worth more than 60 dollars per share while also securing their fantastic cash dividend. Also they want to do some cash buybacks. They have a pretty good plan for them. So this is a five year chart of AT&T stock sixty dollars a share would be way up here. So that’s about 60 percent higher than the current level for AT&T stock. So here are the basics of the plan. And by the way if you’re curious to see a copy of the whole letter I’ve got a link in the description below. And it’s actually quite an interesting read it’s about twenty twenty three pages or so. So it’s interesting if you’re curious about that. But basically they had four or five suggestions that they mapped out in depth. But to summarize those suggestions first they had sell non core assets. Now we’ll dive more to some of these after we run to the basics and what it could mean for AT&T stock. OK. Next up improve operations. Now they’re they’re talking about mostly making operations a bit more efficient and reducing operational expenses. Then they say focus on capital discipline. This is a big one. I come back to this one in a second. And this is right in line with AT&T assets it’s right in line with that whole thing. And then they have lower debt levels. And then finally increase oversight of management. OK. So of these five items I think they’re all great suggestions for AT&T and they’re really good for any company for them but for AT&T I believe that some of these are very very important. Let’s take a quick look at their debt as an example. So this is a chart of 18 times long term debt going back to 2004. And as we could see we had a few big jumps first in 2015. That’s what AT&T bought Direct TV and then there was another big jump last year when 2018 when AT&T buy Time Warner. And as we could see they now have over 160 billion dollars of long term debt. So that’s a ton of debt for any company be sitting on. So we go back to our improvements list. Well clearly improving the debt right here. That would be a great thing for the stock. But AT&T is debt is also addressed with this point here. So AT&T has taking on a ton of debt to acquire new companies that may not be worth their cost. And this brings us to the Direct TV acquisition. So Direct TV has lost subscribers for AT&T for 10 consecutive quarters. Now they’ve also launched direct TV now which they renamed to AT&T now but they’re not doing that much for the company at least not doing as much as they thought that they would. And don’t forget they spent about 48 billion dollars on Direct TV. So the question floating around is should AT&T sell Direct TV. One obvious buyer but these the other large satellite company and that’s Dish Network and AT&T wouldn’t even have to sell the whole company. In theory they could sell a piece of let’s say they sold 60 percent or even 51 percent and they can still participate in the upside. But you push off the responsibility of running the day to day operations to Dish Network. So this is one of those things that Elliott Management stressed AT&T needs to stop going out and making these enormous purchases that are frankly somewhat difficult to combine with their car business. It’s not like AT&T is doing it Warren Buffet style where they go out by a company and then let the business act independently with the backing of a much larger organization behind it. No they’re trying to mix their business right into AT&T whose current business and a good example of this is direct TV when they completed the DIRECTV acquisition. Nearly all of directives management team left the business. Now AT&T is stuck feeling figuring out what to do with the 30000 or so employees that Direct TV had and clearly they haven’t done as good of a job as they could have done. So if AT&T would have stopped these acquisitions and start using their free cash flow to pay down debt while also maintaining their dividend well what would that do to AT&T stock. So this is a chart of AT&T is free cash flow. And as we can see it’s been a bit volatile. But when we add the cash that they paid for dividends each year we can see that. Broadly speaking they seem to have been able to cover their cash dividends with their free cash flow and we can’t forget that for about 35 years AT&T has increased their dividend every year. This is a chart of 18 is dividend on a quarterly basis going back to 2010. And obviously they’ve been quite consistent with the amount that they pay up. So this is great and hopefully management goes ahead and listens to listens to Elliott Management with their business and maybe their stock price really ends up at 60 dollars per share. But how could this stock be worth sixty dollars per share or let’s pretend that they do go ahead and they listen to Elliott. Or maybe they don’t or more likely they only listen to part of what Elliott suggests. Either way what do we think that AT&T stock is worth today given its current trajectory. And what if they do listen. And what if they don’t listen. What is the stock worth. Well using a discounted cash flow valuation method it seems that given the current conservative free cash flow projections I think it’s possible for AT&T stock to be worth that in the 60 dollar range. So here’s how we did this calculation. And if you’re curious I’ve got a whole video on how to calculate this. I’ve got a template that I built and I can email that to you if you’re interested. There’s a link in the description below. In your email address Oh you know it all to you but basically what we do is we take the projections for free cash flow and then we discounted that by the required rate of return of about eight and a half percent. That’s about my standard required rate of return although I’ve used higher and I’ve used lower depending on the situation. The how do we use for that. The lower the fair value of the stock would be. So in theory the higher the required rate return the more conservative the estimates then I use the perpetual growth rate of two and a half percent and we divide that result by the shares outstanding and we get an estimated fair value of about sixty three dollars per share. Now this says fair value of equity and that’s actually not correct. That should really set a fair value of the company because what this is missing is the at least some sort of recognition of AT&T is enormous debt load many times if the debt is at a reasonable level. We can just stop here we can just calculate the value of the entire company both debt and equity. So we don’t need to account for debt but in this case they have so much debt. It’s really important for just looking at the equity which is AT&T stock we’re just looking at that we need to account for that debt. So here we want to add AT&T is net debt. So we take the 450 nine we subtract the one one in net debt and we get a value of the equity of about 288. Well we then divide that by the shares outstanding same shares outstanding as before we get a fair value of the stock of about thirty nine dollars per share. And this actually makes a lot of sense because right now AT&T stock is trading at about thirty seven dollars per share so it’s right in this area. Now what I did here with these two numbers at the bottom is I really took the two extremes in one scenario all of their debt is in play they keep it all and they barely increased our free cash flow. And in that scenario the stock would be about thirty nine dollars per share. So a little bit of upside flip side they pay off all of their debt for some reason free cash flow it doesn’t go up which it really should because profits would be larger in theory free cash flow should go up. But being conservative they pay off all their debt keep the same free cash flow numbers and then the stock is worth over 60 dollars per share but obviously there’s a whole bunch of possibilities in between these two. They could sell direct TV or piece of Direct TV and pay off some of that debt or they could improve their operational efficiency and increase free cash flow at a faster pace or they could go out and do something crazy and make another huge acquisition and that would be a negative thing for them. Unless of course the acquisition outweighs it. But either way it introduces a new risk to this whole thing. But personally I think it’s more likely that this will land somewhere in the middle of this having an activist investor like Elliott Management sitting over AT&T as management’s shoulder sort of peering at what they’re doing could be a very powerful thing. And I think this is a good thing. At the end of the day for AT&T stock which by the way has way underperformed both Horizon and the stock market over the past few years. So maybe in the next few years this could be a positive thing for AT&T and they’ll get a shot to outperform the group. But what do you think. Do you think that AT&T stock is a good buy at this current level given Elliott’s involvement in this whole thing. Please let me know what you think of the comments below. If they haven’t done so yet hit the subscribe button hit the bell icon. Thank you for stick with me all the way into the video if you’re interested in seeing any of the other videos. I’ve got links below. Got that. Spread the excel template if you’re curious. Links below. Thanks. I’ll see in the next video.

0 Replies to “AT&T Stock Analysis – Could AT&T’s Stock Really be Worth $60 a Share?”

  1. i agree with you on this. I own a few shares of T, and by a few I mean less than 10. Was testing the waters. In the red, but less than 5%. Up down over and over again on the gains. Going to keep them and may increase stake in the company if they just focus on the core business.

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