Tough to come in and call it a buy when we were bullish to start the year in the mid $30s. We all know COVID-19 has destroyed markets in the near-term. AT&T is at the top of the most indebted companies in the market. It is a global behemoth. It has been downgraded and left for dead because of fears that it is no longer a wireless company (it is) but is now a global media company (that's true, too). It really comes down to uncertainty. There are fears, and rightfully so, that WarnerMedia and DirecTV revenues will get hit hardest. But the wireless side will likely be hit too as retail shops close for the virus. That is true. But we believe that this is limited truly to the month of March and April, with some lingering but dissipating impacts for the rest of Q2.
The WarnerMedia fears can be partially quelled because the studio can simply push out big screen releases. While the costs may weigh in the interim, revenues can be realized later. For now, production is halted in most cases. As for video subs, with so many people around the globe and especially in the United States being stuck home in isolation per social distancing, it is up in the air on what will happen with subs. On one hand, there is fear over more cancellations due to lack of employment. On the other hand, being stuck at home may lead to some positive pressures from new subs. It really remains to be seen when AT&T reports next month, and what management discussed on the call. From our viewpoint, we have a 7.5% yielding stock now with shares in the high $20s. We believe a play can be made here for your long-term income/retirement accounts. A quarter or two of pain is expected, but this company is not going under, in our opinion. Here is how new money should play:
Target entry 1: 20% of position $28-$29
Target entry 2: 30% of position $26-$27
Target entry 3: 50% of position $24-$25
We believe this approach will allow for a solid cost average and the potential for capital gains on top of a solid dividend. We do not believe the high-yield is a risk here, because even though there will be a rough two quarters, this is temporary. The company has solid prospects and is already saving cash by suspending its accelerated buyback in these trying times. The dividend, however, is covered. It will take a massive 30% plus hit to free cash flow for it not to be covered. We think that is highly unlikely. There are a few things that we will look for next month on the metric side of things. For now, the most recent data is from the Q4 earnings report.