The year-end report card for the stock of the largest US communications network operator, AT&T (NYSE:T), is just plain ugly.
Shares are massively underperforming even as the company is going through a deep restructuring to win back investor confidence.
By the close of Tuesday's trade, AT&T stock, which finished the day at $24.47, was down almost 17% for the year when the benchmark S&P 500 is up 22% over the same period. AT&T’s losses are almost double those of its close rival, Verizon Communications (NYSE:VZ).
This persistent downward trend for T shares has caused the dividend yield to balloon, currently expanded to almost 9%. That should signal to savvy investors that markets fear a dividend cut could be in the cards.
What accelerated AT&T’s downward slide this year is the company’s latest guidance, forecasting that growth in its wireless division will slow next year after a strong performance in 2021.
That warning came after AT&T reported its best quarterly phone results in more than a decade in October, supporting CEO John Stankey’s efforts to return the company to the wireless and broadband businesses it’s best known for.
Dallas-based AT&T is in the middle of a big transformation effort as part of its new strategy to shed its media assets and become a leaner telecom-focused company. The biggest part of this overhaul includes AT&T and Discovery (NASDAQ:DISCA) combining their media assets into a new, publicly traded company.
But this deal, expected to be finalized next year, has created doubts about the sustainability of the company’s $0.56-a-share quarterly dividend amid speculation that the company will cut its payout after the separation of its media assets. The stock’s almost 9% annual dividend yield, the highest among the blue-chip companies, is a reflection of that risk.
Amid this uncertainty, some analysts are now seeing value in AT&T's stock.
Chart: InvestingPro
According to the InvestingPro model, T stock is currently undervalued compared to its peers and could see a 37% jump if its stock moves closer to its fair value of $33.23 a share.
Attractive Risk-Reward Opportunity
Last week, Morgan Stanley upgraded AT&T to an overweight rating from equal-weight, while lowering its price target to $28 from $32. The new projection is still more than 14% higher than AT&T’s Tuesday close. The analyst note added:
“We believe that recent stock price underperformance has created an attractive risk reward opportunity, while we see a number of catalysts to unlock value by mid-2022.”
The note continued:
“We believe AT&T’s core Communications business is undervalued and should rerate as we get more clarity on the WarnerMedia/Discovery transaction.”
Barclays analysts, in a note to clients yesterday, also upgraded AT&T to overweight from neutral, saying that the telecom stock is undervalued, assigning a $30 a share price target:
“We have been flagging AT&T’s relative attractiveness as an investment for some time ... but had held back on upgrading the stock because of expected drag from Warner Media deal technicals and uncertainty regarding the competitive environment.”
“However, the timeline is getting more aligned with the opportunity due to upcoming catalysts such as proximity to the 2022 guidance cycle across telecom companies and potential decision on Warner Media deal structure.”
Bottom Line
AT&T remains a risky bet amid its ongoing restructuring. If the company succeeds, the new structure will allow its management to focus on its core telecom operations and to expand when the full introduction of 5G technology creates new opportunities.
For investors with high risk tolerance, in our view, AT&T remains a suitable pick. Nonetheless, the future of its dividend continues to remain uncertain.