Is AT&T worth buying after its spinoff?

It’s been months along the way, but telecommunications company AT&T (T -0.01% ) has finally closed the book on its entertainment business. The company has completed its spinoff to combine its streaming and entertainment assets with Discovery to form Warner Bros. Discovery.

AT&T has been a controversial stock over the past decade, underperforming after massive mergers that have put the company in debt. Now that AT&T has formally moved on, should investors return to the stock? Here’s what you need to know.

What does AT&T look like now?

The “new” AT&T is very similar to the “old” AT&T. The company goes back to its roots as a telecommunications company and focuses on what it knows best going forward. Now that the spinoff has been completed, AT&T is an independent communications company that will focus on its wireless business and opportunities in fiber optic and fixed wireless data networks.

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The company’s balance sheet is also undergoing significant changes. AT & T’s balance sheet was without a doubt the biggest loser in its decade of pursuing the entertainment industry. Prior to the acquisition of DirecTV in 2015, the company had only about $ 80 billion in long-term debt. But the failure to generate enough profits to pay off debt, plus the addition of Time Warner a few years later, leaves AT&T with $ 178 billion in debt today.

The spin-off sent $ 40 billion in cash to AT&T, which management will undoubtedly use to deal with its huge debt. Investors will get a fresh update on AT & T’s earnings earnings in the first quarter of 2022, but shareholders can expect to see the company’s debt begin to decline.

AT & T’s dividends have been the only bright spot for investors in recent years. Investors may not be thrilled to see management effectively reduce dividends from an annual sum of $ 2.08 to $ 1.11 per share. However, this lowers the company’s dividend payout ratio to free up more money to potentially repay debt, and investors still get a dividend of 5.6% – not bad!

The road to growth going forward

Of course, AT&T needs growth to become more than a high-yield, low-up stock to your portfolio. AT&T failed with entertainment, but it could be heading for something with its new focus.

Management plans to invest heavily to grow its fiber optic and fixed wireless segments in the coming years. AT&T recently held an investor event in March. It highlighted several new industries that will need data connectivity, including work from home, connected manufacturing, gaming, autonomous vehicles and edge computing.

These industries can dramatically increase the demand for network capacity, so AT&T wants to be able to handle it as these segments grow. The company’s wireline segment was to gradually shift from dying landline to fiber optics and landline wireless over several years. By 2025, management’s goal is for these new services to contribute 44% of the wireless segment’s earnings before interest, tax, depreciation and amortization (EBITDA) from just 16% today.

Is AT&T a purchase now?

AT&T trades to new lows after the end of the spinoff, but remember that assets left the company. It will earn lower profits in 2022, so the market will re-price the stock accordingly.

However, we can comb the noise to see what the stock looks like from a valuation perspective. Management is indicative of 2022 earnings per share of $ 2.42 to $ 2.46, down from the 2021 EPS of $ 3.40, which explains the decline in the stock.

If you look at the stock’s price-to-earnings (P / E) ratio using updated guidance, it trades at a P / E ratio of 8. The stock has traded at a median P / E ratio of 17 over the course of the year. of the past decade, even with headaches from DirecTV and Time Warner. The wider market has not yet rewarded AT&T with a better valuation despite the potential for an improved balance sheet.

However, investors should not lose hope. I believe that AT&T is ready to become a healthier business in the long run, which may ultimately mean a higher valuation of the stock. It may take some time before the dust has settled and before management has delivered a quarter or two of value to give the market a sense of how things are going after the spinoff. If you believe in AT & T’s turnaround, stocks are still cheap and will pay you a good dividend to wait.

This article represents the opinion of the author, who may disagree with the “official” recommendation position for a Motley Fool premium advisory service. We are motley! Questioning an investment dissertation – even one of our own – helps us all think critically about investing and make decisions that help us become wiser, happier and richer.

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