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.

REMAINING QUESTIONS

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.

SO WHAT OF THE DIVIDEND?

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.

WHAT ABOUT T STOCK DEBT?

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 T STOCK BOTTOM LINE

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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