AT&T could be a value trap because it generates lots of cash and retains enormous amounts of debt. Value traps are dangerous because they can generate enough cash to stay in business for years without growing.

AT&T Inc. (NYSE: T) could be the best bargain in streaming video. For example, Mr. Market paid $29.83 for AT&T shares on 6 January 2021.

Conversely, AT&T’s HBO Max streaming service added four million subscribers in October and November 2020, AT&T CEO John Stankey claims. Stankey says HBO Max had 8.6 million subscribers at the end of the 3rd Quarter of 2020 and 12.6 million subscribers at the beginning of December 2020.

Therefore, HBO Max’s subscriber base grew by one-third, if Stankey’s claims are true. Interestingly, Stankey says those viewers are watching more HBO Max, Deadline reports. In particular, Stankey claims HBO Max’s total hours of engagement by viewers grew by 36% in 30 days.

Hence, AT&T (T) could have one of the fastest growing streaming services around and a stock. Naturally, some investors will smell value at AT&T but what is AT&T?

What is AT&T?

AT&T (NYSE: T) is not the company Americans think it is. To explain, many older Americans believe AT&T is American Telephone and Telegraph; the historic phone monopoly the federal government broke up in the 1980s.

In reality, AT&T is a modern company management created by merging AT&T Inc. with Bell South, a regional phone company in 2006. That company took the AT&T name because it was more prestigious than Bell South.

Today’s AT&T is a Telecom and cable company with enormous investments in the entertainment industry. Notable AT&T holdings include WarnerMedia (the historic Warner Brothers movie studios), HBO, Turner Sports, Warner Brothers Animation, Cinemax, CNN, TBS, TNT, TCM, Turner Entertainment, DC Comics, the Cartoon Network, the Hanna Barbara animation studios, 50% of the CW broadcast network, and HBO Max.

Characters AT&T owns include Batman, Wonder Woman, Superman, Harry Potter (movies), the Green Arrow, Aquaman, the Justice League, the Green Lantern, Bugs Bunny, Daffy Duck, the Doom Patrol, the Suicide Squad, the Joker, Harlequin, the Teen Titans, the Legion of Superheroes, Scooby Doo, and the Flintstones. AT&T also has access to one of the world’s largest libraries of classic movies through Turner Classic Movies.

AT&T attracted enormous publicity in December 2020 by releasing its big-budget film Wonder Woman 1984 on HBO Max and in movie theaters at the same time. AT&T adopted the interesting strategy of allowing all HBO Max subscribers to watch Wonder Woman 1984 without paying extra. Thus, AT&T can grow HBO Max by using its existing content as loss leaders.

Big Think reports that AT&T owned 98 companies at the time of its merger with Time-Warner in 2018. Non-entertainment holdings at AT&T include AT&T Labs, Ameritech Cellular, AT&T Communications, Cricket Wireless, DirecTV, Pacific Bell, Illinois Bell, SBC Telecom, the International Bell Telephone Company, AT&T Universe, Wisconsin Bell, and YP Holdings.

Is AT&T Making Money?

AT&T (T) makes enormous amounts of money. For example, AT&T reported a quarterly gross profit of $22.501 billion and a quarterly operating income of $6.132 billion on 30 September 2020.

However, AT&T makes less money than it did in 2019. AT&T reported a quarterly gross profit of $24.434 billion and an operating income of $7.901 billion on 30 September 2019.

Conversely, AT&T is generating more cash than last year. For instance, AT&T reported a quarterly operating cash flow of $11.389 billion on 30 September 2019. The quarterly operating cash flow rose to $12.123 billion on 30 September 2020.

On the other hand, AT&T reported a negative quarterly ending cash flow of -$7.182 billion on 30 September 2020. That negative quarterly ending cash flow grew from -$1.872 billion on 30 September 2029.

Can AT&T make money?

On the positive side, AT&T (T) is paying off enormous amounts of debt. For example, AT&T reported a negative quarterly financing cash flow of -$15.857 billion. That means AT&T borrowed enormous amounts of money to build HBO Max, but it can pay those debts off.

Unfortunately, AT&T had $152.980 billion in long-term debt on 30 September 2020. Consequently, I think AT&T could spend have to spend a large percentage of its cash to pay off debt to avoid bankruptcy.

In contrast, AT&T had $9.758 billion in cash and short-term investments on 30 September 2020. The cash and short-term investments grew from $6.588 billion on 30 September 2019.

Is AT&T a Value Trap?

Thus, AT&T can accumulate enormous amounts of cash and debt at the same time. Thus, many cynics will consider AT&T (T) a value trap.

To explain, a value trap is a company with strong value characteristics that only makes tiny amounts of money. For example, a company with enormous debts that still generates significant amounts of cash.

AT&T could be a value trap because it generates lots of cash and retains enormous amounts of debt. Value traps are dangerous because they can generate enough cash to stay in business for years without growing.

Is AT&T Growing?

Investors love streaming video because it is one of the fastest growing businesses in today’s world.

However, AT&T’s revenues and revenue growth are shrinking. For instance, AT&T’s quarterly revenues fell from $44.588 billion on 30 September 2019 to $42.34 billion on 30 September 2020.

Similarly, AT&T has experienced five straight quarters of negative revenue growth that began on 30 September 2020. In detail, Stockrow estimates AT&T’s quarterly revenue growth rate fell from -2.52% on 30 September 2019 to 5.04% a year later.

AT&T’s revenues, revenue growth rate, income, and gross profit are shrinking. However, the debt has also shrunk. AT&T’s long-term debt fell from $153.658 billion on 30 September 2019 to $152.980 billion on 30 September 2020.

AT&T bears will note that the long-term debt has shrunk by less than $1 billion. So AT&T has not shed its value trap characteristics.

What Value does AT&T Have?

AT&T (T) retains enormous value in the form $538.553 billion in total assets on 30 September 2020. Unfortunately, that value is shrinking, AT&T had $548.796 billion in total assets on 30 September 2020.

 

I cannot consider AT&T a growth stock because the assets have shrunk Conversely, I think AT&T retains some value characteristics. It had a low share price of $29.83 on 6 January 2020.

 

Moreover, HBO Max’s success shows AT&T has significant growth potential. Yet I cannot tell if that growth will reverse the revenue, profit, and income shrinkage.

 

I think AT&T is worth investigating because it pays an impressive dividend. AT&T (T) shares will pay a 52¢ quarterly dividend on 1 February 2021. The AT&T dividend last grew from 51¢ to 52¢ on 3 February 2020. Overall, AT&T offered a $2.08 annualized dividend and a dividend yield of 7.23% on 5 January 2020.

 

In the final analysis, I think AT&T stock is worth investigating because it is cheap and pays a lucrative dividend. Plus, HBO Max could give AT&T some growth potential.

 Originally published at https://marketmadhouse.com on January 6, 2021.

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AT&T bears will note that the long-term debt has shrunk by less than $1 billion. So AT&T has not shed its value trap characteristics.
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