Is AT&T the First Casualty of the Streaming Wars?

AT&T NYSE: T is not just a wireless carrier. The company is a digital media company, and one of the largest at that. Although it is not part of the Dow Jones Industrial Average (DJIA) at the moment, the Fortune 10 company is still considered among the bluest of the blue-chip stocks. One reason for this is its status as a dividend aristocrat, having recorded 35 consecutive years of quarterly dividend increases. And today AT&T offers investors one of the largest dividend yields available (currently around 5.3%).

AT&T stock is also rewarding investors with growth. The stock is up 29.6% for the year as of this writing. And the stock beat analysts’ estimates for earnings per share (EPS) in its most recent quarter. AT&T reported EPS of 94 cents per share (analysts had forecasted 93 cents).

But while AT&T is a dividend darling, the latest earnings report showed some cracks in the company’s fortress. Revenue was lower than the consensus estimate and, more significantly, it was 2.5% lower on a year-over-year basis. To understand why that may be a concern is to understand the structure of AT&T.

AT&T is so much more than wireless

AT&T has four distinct business units. Investors are most familiar with AT&T Communications. That’s the mobile, broadband, video unit. It remains the cash cow for AT&T accounting for $144 billion of revenue in 2018. The other large component is WarnerMedia which includes HBO. That accounts for $33 billion. AT&T Latin America and a unit called Xandr make up the other two business units.

Somewhere in these business units is AT&T’s Pay-TV services, notably DirecTV. And that’s where at least one analyst sees a problem for T stock.

MoffettNathanson’s Craig Moffett is suggesting that while AT&T has outperformed expectations in 2019, the future may not be as bright. The issue for Moffett is what he perceives as deterioration in fundamentals. “Over much of the last year, AT&T’s stock price has climbed even as its fundamentals have deteriorated,” wrote Moffett in a note to clients. Moffett has lowered his rating on T stock from neutral to sell. The analyst has a 12-month price target of $30 per share. 

Is the NFL Sunday Ticket the canary in AT&T’s coal mine?

A closer look at Moffett’s critique of AT&T points squarely at its entertainment business, specifically given the trend towards cutting the cord that has become so popular. Moffett estimates that AT&T will lose 15% of its premium video subscribers by the time the calendar changes to 2020. That’s a big number. And it won’t be offset by a modest increase in average-revenue-per-user (APRU).

That’s where the canary in a coal mine analogy comes in. A lot of investors are forecasting that Netflix NASDAQ: NFLX will be the first domino to fall in the streaming wars. But that may be a head fake for where the real battle is. The National Football League season ends on December 29. Why is that significant?

Many DirecTV subscribers (this writer included) have DirecTV primarily for access to the NFL Sunday Ticket. However, with the season-ending exactly two days before the calendar year ends, it’s not inconceivable that many “seasonal” subscribers will abandon DirecTV. This is particularly true as the NFL may reconsider its exclusive deal with DirecTV to recognize the shift of consumers to streaming services.

Is 5G enough to make up the shortfall?

A significant decline in revenue by the company’s entertainment division puts a lot of pressure on the company’s wireless division to make up the shortfall. And the company’s own estimates forecast 2% year-over-year growth for that. That’s far short of the 8% revenue growth that Moffett believes the company will need to meet its forecast.

The launch of 5G phones in 2020 will undoubtedly provide a boost. But how much of a boost will largely depend on the state of the economy? Smartphones (and the accompanying contracts) are akin to auto loans. There is a lot of joy in having a phone that is paid off. If the economy gets weaker, it’s not unrealistic to think that many consumers will hold off on the “next new thing”.

The bottom line on AT&T Stock

Keep in mind that while Moffett’s price target would wipe out all of AT&T’s stock gains for the year, the stock would still be close to its five-year average. And that means income investors would be in no danger of seeing a dividend cut. And once a company becomes a dividend aristocrat they usually make increasing that dividend a priority.

And if you’re an investor who’s looking to take advantage of the upcoming 5G revolution, only AT&T and Verizon have the ability to maximize this technology’s full potential. With that said it should be noted that AT&Ts PE ratio which currently sits at 17.15 compares favorably to Verizon NYSE: VZ which has a PE ratio of 15.5.