AT&T investors are getting the best of both worlds today. The stock’s 4.85% dividend yield is almost twice that of the 10-year Treasury and well above the 2% paid by the S&P 500. And with AT&T’s (ticker: T) stock trading at 13 times forward earnings, its valuation looks attractive.
AT&T also offers growth potential. Under a President Trump, the telecom giant should benefit from a kinder regulatory environment and lower taxes. The company should also profit from its continuing move into media, particularly its proposed $106 billion purchase of Time Warner (TWX), now awaiting regulatory approval.
Earlier today, Baird Equity Research analyst William Power upgraded AT&T stock to Outperform. This upgrade was especially notable given that Baird’s opinion of AT&T had been stuck at Neutral since 2012.
The upgrade lifted AT&T’s share price more than 2% to a recent $41.19. The stock, up 11% since the presidential election, could generate a double-digit total return in the next 12 months.
“After many years of avoiding the telcos due to competitive concerns, we are upgrading AT&T following a confluence of events that we believe significantly improve the company’s prospects over the coming years,” says Power.
In short, Ma Bell is becoming what Power calls “Ma Media,” meaning it’s no longer your parent’s telephone company.
Earlier this year, AT&T, like other telecom stocks, attracted income-hungry investors fleeing global market turmoil. Shares hit a multi-year high in July at $43.89 then fell as investors dumped pricey dividend stocks and Trump savaged the Time Warner acquisition after it was unveiled in October.
The post-election environment has been far kinder. The FCC is expected to be much more accommodative under Trump, especially regarding Net Neutrality rules. And with lower taxes, Baird’s Power anticipates “a business investment tailwind not seen in years.”
That post-election optimism has extended itself to the Time Warner deal. Trump initially vowed to block the deal, which would give AT&T control over prime media assets such as HBO, CNN, as well as a major movie studio. More recently, however, the Financial Times recently reported that Trump’s transition team assured the telecom titan that it would review the transaction with an open mind, boosting confidence that the deal would pass regulatory muster.
If it does, AT&T would become a very different company.
Last year’s $67 billion acquisition of DirecTV has already significantly boosted AT&T’s entertainment holdings. The new Internet-TV streaming service, DirecTV Now, unveiled earlier this month ups its cool factor. Barron’s Next called DirecTV Now “a game-changer.”
Acquiring Time Warner will bulk up AT&T and further diversify its revenue stream. Entertainment, now 31% of the company’s topline, will account for 40% of the new entity’s annual revenue, making it AT&T’s largest business, surpassing business solutions.
“Time Warner is a solid strategic fit,” writes Power.
Barron’s concurs though earlier this month we argued that DirecTV Now seems unlikely to make much money for AT&T in the near term. The big question remains what sort of regulatory regime Trump will implement.
AT&T’s diversification strategy has resonated with Wall Street. Add a less restrictive regulatory environment, fat dividend yield and enticing valuation and AT&T becomes an easy call.