AT&T has fundamentally transformed its portfolio over the past year, morphing from a lumbering telecom and media conglomerate into a more streamlined company.
The focus is on 5G wireless and fiberoptic broadband services. DirecTV, WarnerMedia, Vrio, and Xandr all are gone or in the process of being divested.
AT&T (ticker: T) completed the spinoff of its media business on April 8, merging the unit with Discovery to create the streaming-centered entertainment company Warner Bros. Discovery (WBD). Now AT&T is a telecom pure-play once again, with subscription businesses that produce recurring revenue and no more cyclical media exposure.
The company hopes that its new profile will help reverse a decadelong stretch of underperformance versus the market and competitors' stocks.
Barron's spoke with CEO John Stankey about the slimmed down company's next steps. They include vast investments in 5G wireless equipment and laying out fiberoptic cable, plus a lower debt load and a smaller, more manageable dividend commitment.
Here are highlights from our conversation, edited for length and clarity.
Barron's: It has been a busy year and a half of divestments and transactions for AT&T. How do you feel now that the portfolio reshuffling is behind you?
John Stankey: I feel really good, I feel proud of the team. There was a lot of extra work and sacrifice to get here, and it was not the most pleasant work to do. Now that we're on the other side, I'm energized about the opportunity to play some offense.
The new AT&T is going to be the best wireless and broadband provider in the United States. No question we have the management team and the capital structure to go after that now. When this group of folks has the resources they need to compete, they can be the best in the business and they're going to do that.
AT&T has more than 200 million customers. What's your current read on the health of the U.S. consumer and economy? And with some predicting a recession as soon as next year, how are you preparing AT&T for that possibility?
I don't want to say we're recession proof, I don't think any business is recession proof. But when we do our customer research and ask them if they'd prefer to give up their cellphone, their electricity, their vehicle, other things first—we rank very high on that. We're one of the few services our customers will fight to keep. I think they said they'll still want to breathe before giving up their cellphone, but the reality is we offer an essential service for people today. It doesn't mean that customers in a high-inflation time won't make choices and look to save a few bucks here and there. I think every industry is exposed to that.
We're not seeing any slowdown now, we're actually seeing things as pretty robust at this juncture. But we've started to look at things like taking conservative increases to bad debt reserves, making sure we don't fall behind on those types of things. We're preparing for the reality that there might be a tighter economic environment moving forward, but we haven't seen it manifest itself yet.
What's the inflation impact on AT&T's costs?
We're seeing wage pressures, but we've built that into our guidance. The contracts we've been signing with our unions are coming in consistent with that. I expect that wage costs will continue to increase as we go through the year. We're likely to see some other input costs increase as well.
But when you think about what we're doing, for example putting fiber into the ground, that wage price is only a portion of the cost of digging the trench and building that out. And those are long-term assets, so the cost is amortized over the life of the asset. Fiber might be 25 to 30 years, so a modest increase in upfront cost doesn't kill you in any given year of a long-life asset.
AT&T plans to spend $24 billion in capex this year, up from around $20 billion in the past few years. Where will that go?
We don't disclose exact numbers. But in terms of increases from historical levels, one big area is the fiber build: We're extending our network by several million homes per year. Second, we're transitioning from 4G to 5G. We've stepped up capital spending on new equipment to put to work the spectrum we bought . That's incremental over our run-rate spend as well.
And finally, we're making investments in the information technology and support side of AT&T. That's improving customer-care assistance, improving our online capabilities, and shutting down old applications to improve our cost structure.
All that investment is capital-allocation priority No. 1. What comes after that?
Next is to maintain a strong and competitive dividend that's toward the top of the Fortune 500 in terms of yield. We'll make sure that we sustain that in a way that satisfies our retail shareholder base.
After that is repairing our balance sheet. Two weeks ago, we checked the box on that with the almost $40 billion in cash coming back from the WarnerMedia deal. We dramatically improved our flexibility on the balance sheet. By the end of 2023 we expect we'll be at a net debt-to-adjusted Ebitda [earnings before interest, taxes, depreciation, and amortization] ratio of 2.5 times. With the amount of cash flow we have, we're extremely comfortable at that level.
Then that will open up a new chapter of how we think about capital allocation. The right way to deploy incremental capital at that point could be paying down more debt, stock buybacks, accelerated investment in the businesses, adjusting the dividend. We'll weigh all of those things once we get the balance sheet to 2.5 times leverage.
Why should Barron's readers buy AT&T stock today?
Because AT&T stock is dramatically undervalued for the inherent value of the business and when you look at the dividend yield. As this company continues to improve its operations and performance, you're getting paid to hold the stock at a very competitive rate.
We've got a management team that's demonstrating it can execute in the market in a sustained fashion, and build the kind of quality, annuity revenue streams that investors who want a stable outlook in an uncertain environment should value. We're an asset-intensive business that's a great defensive play in a high-inflation environment. The value of the asset base increases with inflation.
Shareholders got about 0.24 shares of Warner Bros. Discovery stock for each AT&T share they held before the spin off. Are you holding on to all of your WBD stock?
Yes, I am.