AT&T: director’s cut
Best and worst deals of 2018: telecoms group eludes reinvention
A bad film often dooms a director’s next project. Luckily for Randall Stephenson, the AT&T boardroom is a more forgiving place than Hollywood. Mr Stephenson orchestrated the audacious $86bn purchase of Time Warner that finally closed in 2018, two years after it was announced.
The legacy telecoms group is now supposed to be an integrated powerhouse of entertainment and content delivery. And yet its shares have fallen 28 per cent in the last year. A lasting verdict on the Time Warner bet is years away. But the skittishness among its shareholders can be traced to its 2015 $49bn purchase of satellite TV group, DirecTV.
At a recent shareholder gathering, Mr Stephenson tried to play down the heft of the DirecTV segment, pointing out that it accounted for only 15 per cent of the company’s profits. One reason its profits are a fraction of group results is that the business has declined steeply in 2018, with more than 1m customers cancelling subscriptions.
The irony is that AT&T’s core mobile phone unit is prospering after years of disappointment. But the loss of TV customers has soured sentiment on the stock now trading at less than 8 times 2019 estimated earnings. Its dividend yield has risen to 7 per cent.
Unease surrounds the dividend. AT&T’s debt total has jumped to $185bn, higher if leases and pensions are included. The group says it will earn $26bn in free cash flow next year. About $14bn will go to the dividend with the rest paying down debt.
With highly leveraged companies, just a modest uptick in performance can lead shares to snap back hard. But for now AT&T resembles a lumbering titan extremely vulnerable to an economic slowdown. The mountain of debt ensures that Mr Stephenson does not have the wherewithal for a third deal to create a trilogy.