AT&T (T) shares have missed out on the recent three-day rally, showing a poor performance against the S&P 500 as investors continue to weigh in the likelihood of a potential dividend cut, considering the fact that the valuation of the telecom giant is highly driven by its fixed-income component.
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Why is AT&T stock price falling?
To address this question we have to take a look at the company’s quarterly results, which were published on April 22.
One of the most important trends that have been affecting the top line of AT&T is cord-cutting. This trend consists of the progressive migration of users from traditional satellite TV plans to streaming services such as Netflix or Disney+.
By the end of the first quarter, nearly one million users unsubscribed from AT&T’s paid plans, and analysts agree that this ongoing trend may be accelerated by stay-at-home policies, as users prefer to watch content they can pick and choose rather than sticking to what the TV has to offer.
In a nutshell, the company’s first-quarter results, which have been the most important AT&T stock news recently, featured lower revenues, stalled earnings, and a $2bn (£1.6bn, €1.8bn) reduction in free cash flow, which is one of the reasons why investors may have decided to ditch the stock, fearing an upcoming dividend cut.
AT&T stock outlook
AT&T shares have lagged in their recovery, even during the recent late-April and early-May market rallies. Right now the stock is nowhere near its 50-day or 200-day moving average and it is unlikely to surge, as it hasn’t been able to pick up the market’s pace even during the most optimistic sessions.
So far this year, the stock has lost 21.4 per cent of its value and is trading 11.7 per cent above its 52-week low of $26.77 and 30.8 per cent below its 52-week high of $39.63. The company’s dividend yield sits at 7 per cent, which is fairly attractive as long as AT&T manages to maintain its current dividend for the rest of the year.
Investing in AT&T stock at this point requires careful consideration, especially if investors are seeking to benefit from this above-average dividend yield.
AT&T’s management team commented that they “expect free cash flow to provide ample dividend coverage and debt paydown”.
So far, they have a decent track record of keeping their promises, so there’s a good chance that they will deliver on this commitment. Meanwhile, the company’s cash reserves and debt seem manageable for the foreseeable future, so no obvious hiccups can be seen on the horizon in terms of dividend payouts if management decides to maintain their current dividend policy as is.
AT&T stock forecast 2020
Let’s now dive into AT&T stock predictions, based on the company’s current earning targets and valuation multiples.
As with many other companies nowadays, AT&T has withdrawn its full-year earnings guidance since the proportion of the economic fallout resulting from the Covid-19 outbreak is yet to be determined.
That said, analysts are boldly forecasting annual earnings per share of $3.23 for 2020 along with an EBITDA of $56.25bn. This estimate is 70 per cent higher than the company’s 2019 earnings and 13 per cent higher than its 2018 EPS.
There are various elements that contribute to the uncertainty around the AT&T stock price forecast, including the company’s ability to find a way to stop the bleeding on this cord-cutting trend, along with potential obstacles related to Warner Media’s operation in term of producing new material, as quarantine measures may continue to be in place even if the rate of contagion decreases by second quarter of the year.
That said, if we take the $3.23 forecasted EPS at face value and apply a P/E multiple between 15 to 18, in line with the company’s historical P/E, that would result in an AT&T share price forecast ranging from $48 to $58 by the end of the year.
These targets would result in a 60 to 90 per cent capital gain by December, as long as the earnings estimate is hit.
That’s not a mild “if”, though. There’s a lot of uncertainty as to how this crisis will play out over the course of the next few months and it is difficult to predict how it will affect consumer patterns, i.e. cord-cutting, the economic landscape of AT&T’s key markets, and the company’s cash flow.
On the other hand, while analysts are anticipating earnings in the range of $3 and $3.50, their price targets are possibly expecting lower P/E multiples for AT&T, as their average target price for the next 12 months is $33.6, which represents a 12.86 per cent increase from the last price of $29.79. (as of May 11, 2020).
AT&T stock: Buy or Sell?
Depending on the holding period, there are three different AT&T stock projections you should consider, in choosing this stock as an investment.
In the short-term, there seems to be strong negative sentiment towards the stock, possibly as investors are seeing a lot of downsides from the acceleration of cord-cutting and potentially higher declines in AT&T’s subscriber base.
That said, since the company has missed the two recent rallies, it is unlikely that it will gain from any subsequent ones until the virus situation is contained and the fight between satellite and streaming resumes in a more levelled battlefield.
In the medium term, let’s say between Q3 and Q4, there are strong expectations regarding a potential V-shape economic recovery, as lockdowns are lifted and we return to business as usual.
In that context, if the company manages to hit its estimates, there’s a lot of upside for the stock, as outlined in the previous section.
Moreover, as a dividend play, analysts believe there are enough merits to hold AT&T as a fixed income asset. The dividend yield is great and even though there’s some degree of uncertainty about how capable the company’s finances will be to sustain it, there is a strong chance that the dividend is kept as is, even if that results in a higher payout ratio.
Therefore, if to answer the common “Is AT&T stock a good investment” question, one may say it depends on the purpose of your investment (dividend play) and on how long you are willing to hold on to the stock until you see some gains (short term = high chance of losing money; mid term = potential gains).
Still, with contracts for difference, it does not matter whether your view of the AT&T stock forecast 2020 is positive or negative. You can always try to profit from any future price fluctuations, regardless of their direction by taking a long or a short position respectively. Follow the latest stock market news and track the T live rates with Capital.com.