AT&T Investors Are In For A Gift This Holiday

T stock is being favorably evaluated by analysts as the TimeWarner merger approaches completion - but questions remain.

AT&T (NYSE:T) stock has had its best week since the beginning of summer. The stock has risen 6.5% since December 16. Analysts have boosted the stock's price target, which has brought about a lot of optimism. Both upgrades were from Equal Weight to Overweight by two analysts.

AT&T got upgrades from Morgan Stanley (NYSE:MS) upgraded AT&T and Barclay’s on December 16th and 20th respectively. And although Citigroup (NYSE:C) reiterated a Hold rating on December 7, the analysts acknowledged that the merger of WarnerMedia and Discovery (NASDAQ:DISCA) could double in value. This based on the strong free cash flow (FCF) generated by the two companies.

So, would that be enough to move AT&T stock higher? Maybe, but maybe not. Nevertheless, it could be enough to provide support for a stock that needs it.


That'S not a sure sign that T stock is a buy. Since reaching its 52-week high in May, T stock has fallen 27%. Many questions remain for the company.

The stock's spurt in July may have been a dead cat bounce. However, investors were wise not to impulsively sell as the unknown is worse than known risks. At the time, T stock was oversold.


We have to tip our hat if you've kept T stock throughout of its recent turmoil. It hasn't been smooth. And the only thing that has prevented more income-oriented investors from fleeing is its dividend, which, for the time being, is still one of the best available.

The big change will come when AT&T completes its spin-off of WarnerMedia to Discovery. When that happens, AT&T will cut its dividend. That was the information that drove many investors to sell their assets.

This is where the waters get murky. AT&T shareholders don’t know how they'll get shares of the new company - to be called Warner Bros. Discovery (WBD).

Indeed, AT&T has not stated whether the shares will be done through a traditional spin-off or if T shareholders would get an exchange offer. In an exchange, shareholders already on record would get WBD shares but only after they relinquish all or part of their AT&T shares.

This is a bit confusing, isn't it? Because while AT&T's dividend will certainly be reduced, it will not be discontinued. And that implies investors may not want to sell their shares.


Another issue that investors have had with AT&T is its massive debt, which is about $150 billion and must be serviced with $7 billion in yearly interest payments. However, a recent investor presentation appeared to allay worries on this point.

AT&T will post $20 billion in post-interest FCF, and they will pass off around $50 billion in debt to WBD. And, considering that AT&T's FCF is generally more than twice the rate of its debt payments, AT&T’s debt looks manageable. Of course, that's assuming the company doesn’t have plans for the cash.


The company still has to regain the shareholders' trust. Moreover, there need to be answers about exactly how shareholders will get shares of the new entity.

It's a good sign that analyst upgrades have occurred. And as shareholders receive their dividend, they may look at AT&T's current consensus price target of over $30 per share. That might be enough for risk-tolerant investors to consider purchasing the stock.

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