WBD - Breaking Up With AT&T Again

2023-08-01 16:52:42 ET

Summary

• A few weeks ago I notified subscribers via chat and webinar that I was selling most of my AT&T stock. I have now sold it all.
• While I think AT&T survives and does well in time, that time seems to be further down the road with the potential liabilities of their lead cables.
• While I feel like there are things at AT&T that should be done, and they have made progress, the calendar just continues to add pages.
• The share price is not benefitting from AT&T having a dividend and the company needs the money for capex and debt, making the dividend very vulnerable to a huge cut.
• Consider your punch card for stocks. It is very difficult to justify AT&T as a top 20 or 30 or even 50 holding anymore - there are many better ideas. Sell AT&T.

I have been in and out of AT&T ( T ) since the late 1990s. It was one of those stocks that was easy to forecast. I was able to pick it up near bottoms, ride it for a year or two or three, then sell it near tops. It hasn't worked like that in a while now.

Because owning AT&T stock isn't easy to own anymore, I have sold it. I've done a Charlie Munger on it:

"If something is too hard, we move on to something else. What could be simpler than that?"

That's where I'm at with AT&T. It's too hard. I probably should have been there sooner. I am putting money in other places where it is being treated better to make my 30% loss back.

What Should Be And What Is With AT&T

AT&T could have a bright future again someday. I wrote about all the reasons a few months ago here:

Buy AT&T For A Strong Dividend And Hidden Growth

The hidden growth story still appears to be in the future somewhere, but, it's not happening now and might not for years. Maybe AT&T is still tied into problems of the past.

In the past decade, AT&T has faced challenge after challenge. First, it was a slew of bad mergers, then price wars in cell coverage and now a steady drip, drip, drip of slow growth into debt maintenance, dividend payments and high capex.

I thought they would overcome all their headwinds faster, but management has not found a way. Their market might just be that stuck for a while. That makes it very hard to be an investor.

What finally made me sell were two new realities:

• Potential liabilities from lead cables.
• The fact that the stock gets no price support from having a dividend.

As such, I have completely sold out of AT&T and will put my money where it is being treated better now and likely for the next couple of years - at least.

Dividend Risk

AT&T used to protect its dividend, but took the opportunity of the Warner Brothers merger into Discovery ( WBD ) to "right size" its dividend. Well, there might be some more right-sizing coming.

There are four core reasons AT&T might cut the dividend - potentially to zero or just over zero.

1. In order to generate growth in fiber, their capex needs will be very high the next five years.
2. About the time the big capex requirements start to fall, the company starts running into big debt repayments and who knows if rates will be lower or higher.
3. The new allegations of laying lead cables and not disclosing the risks is a potential liability at both the state and Federal levels (I don't think it's big, but what do I know).
4. This might be the most important - the stock is not benefiting from having a dividend. The last cut chased away a lot of Boomer investors who will probably never be back.

The 4th item is what really scares me. If the dividend is not supporting the share price, why would management keep the dividend? They need the capital elsewhere in the company, in particular, for capex to fuel growth in fiber and in a few years to pay down debt.

Once capex is lower and a few big bonds are paid down, I can still see a better future for AT&T that includes more free cash flow and share buybacks. But, that might not be for 3-5 years and the market just hates this company right now. That's a long rehab.

Investment Quick Thoughts

I know articles have gotten long and full of anecdotes because somehow that gets more eyeballs. I'd rather make a weak attempt at the Hemingway approach here - to the point in as few words as possible.

The risk at AT&T has risen, and though I think long-term it's fine, if existing is fine, I can do better things with my money for the next year or two or three…

If AT&T does indeed cut the dividend again, I think the stock falls to single digits and then faces a long path to regaining investor confidence. I put the odds of a deep dividend cut at around 50/50 at this time, which is much too high for a retiree dividend stock.

I do think there could be reasons to own AT&T stock again someday if things go well. I'll wait to see which way the wind blows some other day. For now, sell AT&T stock and put your money somewhere better.

For further details see: