Addition with Subtraction Doesn’t Turn AT&T into a Purchase

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Consensus from InvestorPlace brain trust what’s that AT&T (NYSE:T) became a better company after completing the WarnerMedia spinoff and subsequent merger. That may be true, but that doesn’t make T’s stock a buy.

This is why I feel this way.

T Stock Trading Price 1996

As I write this, AT&T’s stock price is 26 cents under $24. In the last 25 years, T’s stock has traded this low on three other occasions: 1996, 2002, and 2009. If you put your money into AT&T in September 1996, you’d get a total cumulative return of 240%. Sounds great, but manages to achieve a compound annual growth rate of 3.6%, including dividends.

I’ve written about this before.

The opportunity cost of buying and holding AT&T for two and a half decades has undermined the high-level value. It’s this argument that prevents me from recommending the company’s stock despite the fact that you’d have to be utterly stupid not to realize AT&T is a better business without WarnerMedia.

Of course. Debt reduction alone makes it better. However, we do not invest in bubbles. There are 43 companies with market capitalizations greater than AT&T’s current market value of $170 billion. Many of them still grew like weeds despite their large size.

I would be amazed if Berkshire Hathaway (NYSE:BRK-ANYSE:BRK-B) did not outperform AT&T over the next decade, although Berkshire had succession issues hanging over the stock.

T Stock Not Slam Dunk

I’ve always wondered that just because a company is strong at 5G, it should be a “slam dunk” investment in the long term. It doesn’t matter that AT&T always does one thing well, and that’s disappointing shareholders.

Over the years, retail investors became so addicted to AT&T dividends that they forgot to pay attention to whether the dividends were being paid out to shareholders as opposed to dividends. S&P 500.

Spoiler alert: No.

AT&T traded at 1996 prices for a reason. Incompetent management in C-suite. Whoever runs the company in the future will find a way to screw things up.

Why wait for AT&T to change? Will never.

Dividend Recovery

Steve Booyens of InvestorPlace recently discussed how the WarnerMedia spin-off could trigger a dividend recovery. And there is an addiction that comes with it. I gotta get my dividends, man!

“Before cutting its quarterly dividend by 47 percent in May last year, AT&T was seen as the ultimate dividend aristocrat with one of the most profitable dividend yields,” Booyens wrote on March 3.

The best dividend aristocrats are not those with high dividend yields but those who grow their annual dividends faster than the market at large and their peers. The dividend yield should be irrelevant.

At this point, the company has a problem.

It can do one of two things with its improved financial position: It can choose to keep dividend payouts relatively low from a historical perspective. But, at the same time, it continues to pay off debt, invest in 5G, and buy back shares. Or, it could go back to the days of the 7% dividend yield.

In the former situation, it ran the risk of losing dividend lovers—those who had not yet moved on—who were infatuated with its dividend aristocratic reputation. It also faces the possibility that it will not execute its 5G plans as well as some of its competitors.

So what does this have to do with growth? Buy another WarnerMedia or DirecTV? We know how it goes.

Finally, it is risky to have a 7% dividend yield at times of higher interest rates, and a guaranteed investment is more attractive than owning a stake in a capital-intensive business with low to medium income growth.

I wouldn’t find any of these options appealing, but it’s your money.

Bottom line on T Stock

Let me leave you with an example of a company that allocates capital in the best way. I’m talking about Deere & Company (NYSE:DE).

According to its fiscal 2022 presentation, it generated $54.6 billion in cash from operations between fiscal 2004 and fiscal 2021 (end of October). The company returns approximately 55% to shareholders through dividends and share repurchases. Only $4.6 billion was used for acquisitions, a third of its capital expenditures.

Between October 29, 2004, and October 29, 2021, DE had a total cumulative return of 1.527%. During the same period, AT&T’s total return was 155%, one-tenth of the 17-year return.

If this doesn’t make you immediately switch your buying interest to Deere & Company from AT&T, nothing will happen.

Good luck with your T stock. You will need it.

As of the date of publication, Will Ashworth does not hold (either direct or indirect) any position in the securities referred to in this article. Opinions expressed in this article are those of the author, subject to InvestorPlace.com Publishing Guidelines.

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