Under previous CEO Randall Stephenson, AT&T (NYSE:T) took on massive debt to build an entertainment empire. But the high costs of deploying a 5G network and the competitive nature of the U.S. telecom market led current CEO John Stankey, in just his first year in the top spot, to unwind his predecessor's decisions.
AT&T's stock price dropped after the company announced its WarnerMedia division would combine with Discovery to form a new entertainment entity, and the deal would impact AT&T's high-yield dividend. The stock price hasn't recovered since it hit a 52-week high of $33.88 in May shortly before the announcement.
But now that AT&T is returning its focus entirely to its core telecom business, there are reasons to be optimistic about the company.
AT&T experienced a strong first half in 2021 with revenue of $88 billion compared to $83.7 billion in 2020 thanks to strength in its telecom business. The company's mobility segment, its largest revenue-generating division (made up of wireless-service and equipment income), saw revenue increase 10.4% year over year in the second quarter.
The double-digit performance over last year is to be expected given the coronavirus pandemic's impact in 2020. What's more impressive is that the mobility segment's second-quarter revenue of $18.9 billion exceeded 2019's pre-pandemic total of $17.3 billion.
The mobility segment's service revenue has steadily climbed for several quarters after the pandemic's inception put a dent into the second quarter's performance last year.
AT&T's service revenue growth was propelled by strong subscriber gains. The company's net adds among postpaid subscribers, the telecom industry's most valuable customer segment, totaled 1.2 million in the second quarter, a dramatic turnaround from the prior year's loss of 154 thousand. Postpaid phone net adds over the past year were the best the company has seen in over a decade.
This subscriber growth was strengthened by record low postpaid phone churn of 0.69%. Retaining customers is just as important as acquiring new ones, and AT&T is excelling at both.
Other key factors
AT&T's telecom strength is complemented by the growth in its HBO Max streaming service, a key component of its WarnerMedia entertainment division. The service was launched in May of last year, and has steadily grown subscribers every quarter.
HBO Max is among the top five streaming services subscribed to by U.S. households. Consequently, AT&T's direct-to-consumer revenue, which includes HBO Max, rose to $2.1 billion in the second quarter from $1.6 billion last year.
Although HBO Max is part of the deal to combine WarnerMedia with Discovery, shareholders will receive shares in the new company, called Warner Bros. Discovery, after the deal closes next year.
While investors weren't pleased to learn the WarnerMedia deal included a resizing of AT&T's high-yield dividend, it's not the only element weighing on AT&T's share price. Another factor is the company's mountain of debt. At the end of the second quarter, it had total debt of nearly $180 billion.
The company will see some of that debt move with WarnerMedia to the new company. As a result, AT&T expects its multiple of net debt to adjusted EBITDA to be less than 2.5 by the end of 2023, compared to 3.2 at the end of the second quarter.
The final verdict
AT&T might have been an attractive investment for its dividend before the WarnerMedia deal, but it will remain attractive for several reasons after the deal closes. Its core telecom business shows a strength not seen in years under the leadership of Stankey.
AT&T is also in the early stages of transitioning to its 5G network, giving the telco years of revenue opportunities ahead. The company already adjusted its 2021 guidance up from revenue growth in the 1% range to between 2% and 3%.
HBO Max is performing well, and the WarnerMedia merger with Discovery will help HBO Max continue to expand by accelerating growth in its global footprint. Today, HBO is predominantly a U.S. offering with only 20.5 million of its 67.5 million subscribers from international markets. This gives plenty of room for international expansion in the years ahead.
Investors can benefit from AT&T's high-yield dividend now, and after the WarnerMedia deal closes, they will own shares in both a telco showing strong growth as well as a burgeoning entertainment company. AT&T will remain a good income stock after the deal, but one with a strong telecom business and more of its free cash flow available to invest in the company's 5G future. These factors make it worthy of investment.