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3 reasons why the AT&T share will continue to stagnate

"Underperformance" has been the buzzword for far too long AT&T. In the past 25 years, the price of the Telekom share has risen by only 25%. During the same period of time, the S&P 500 gained almost 540% in value. While the popularity of 5G networks offers the potential for AT&T stock to resume growth, the stagnation in stock price for this company is likely to continue for the foreseeable future for three reasons.

1. Too much focus on non-core assets

AT&T has invested heavily in non-wireless assets. For one, it spent $ 67 billion (including assuming $ 18.5 billion in debt) on cable television alternative DirecTV in 2015. In 2016, it spent $ 85 billion on what is now WarnerMedia. The purchase of WarnerMedia led, among other things, to the formation of HBO Max, which increased its subscriber base by 2.7 million in the last quarter alone. However, the $ 14.99 per month fee that the company HBO Max is charging doesn't make up for the $ 64.99 per month minimum cost that fewer and fewer DirecTV subscribers are paying.

However, DirecTV's shrinking subscriber income is the least of its problems. DirecTV has really shaken AT&T since purchasing it in 2015. The rise of streaming led to massive customer exodus and a significant devaluation of assets. Despite this challenge, AT&T refused to fully sell this loss-making stake. Although DirecTV was technically outsourced, AT&T decided to hold a 70% stake in this new company. AT&T now values ​​the spin-off, which also includes DirecTV, at just over $ 16 billion. It is rumored that AT&T is trying to sell its remaining stake.

Compared to Telecom's problematic expansion efforts, which are not focused on 5G, the roughly $ 9 billion that Verizon (unwisely) for AOL and Yahoo! has spent a comparatively small problematic investment. In addition, T-Mobile US Concentrated exclusively on mobile communications and 5G expansion. The purchase of Sprint in 2020 significantly increased the company's debt. But at least one was focused on the expansion in the telecommunications sector.

2. The cost of the dividend weighs on AT&T

The cost of the dividend also weighs on AT&T. Last quarter, quarterly free cash flow of nearly $ 5.9 billion was enough to cover dividend costs of just over $ 3.7 billion. This corresponds to 63% of the free cash flow. Still, Verizon only pays out about 50% of its free cash flow in the form of dividends, while T-Mobile doesn't offer a dividend payout. This growing commitment puts AT&T at an (admittedly small) competitive disadvantage.

Plus, the payout has risen for 35 straight years, making AT&T a dividend aristocrat. Shareholders are now getting $ 2.08 per share, which is roughly a 6.6% return. That's nearly five times the S&P 500's average return of 1.4%.

However, the dividend creates a dilemma for AT&T. The fact that AT&T is a dividend aristocrat helps stabilize the stock price. It's an incentive for funds and investors used to annual payout increases. But with current returns, a payout hike doesn't seem necessary to keep attracting investors. Unless it is necessary to maintain Dividend Aristocrat status. In addition, stocks that have given up this status have often suffered from sell-offs for years.

AT&T has not increased its payout so far this year and will lose aristocratic status if the payout does not increase in 2021. While AT&T is likely to raise its dividend by the end of the year, this has so far created uncertainty.

3. AT & T's investment in 5G is costly

The cost of the dividend also means AT&T has less capital to spend on upgrading its network. In 2020, AT&T is spending nearly $ 15.7 billion in investments, the majority of which will go into building its 5G network. That's a decrease from just over $ 19.6 billion in 2019 spending. By comparison, Verizon spent $ 18.2 billion in 2020. T-Mobile US put $ 11 billion in investment funds on the table during this period.

For now, investors don't have to worry about network speeds. The Ookla Speedtest recently rated AT & T's network as the fastest for both 4G and 5G. However, both competitors have expressed an intention to improve speed and quality.

T-Mobile plans to intensify the competitive situation. In a letter published last fall, T-Mobile CEO Mike Sievert stated that consumers no longer have to choose between "great value and great network". The company therefore wants to improve its network quality and compete for more affluent business customers.

Additionally, Verizon spent $ 45 billion in the government-run C-band auction earlier this year. This is almost double the $ 23 billion allocated to AT&T. That brought AT & T's total debt to $ 180.2 billion, and that total debt could limit AT&T. During the earnings announcement for the first quarter of 2021, CFO Pascal Desroches said the company would focus on deleveraging. Nonetheless, this burden could hamper future investment.

In addition, AT&T has not yet presented a definitive Network-as-a-Service strategy. Such a possibility offers an opportunity to further monetize the network and thus stabilize the balance sheet. In contrast, Verizon has partnerships with AmazonsAWS and Hondas autonomous driving and others. AT&T will likely have to follow suit to stay competitive and better monetize its network.

What that means for AT&T

AT&T currently remains competitive in the telecommunications space. As long as the company can produce enough cash flow, it should maintain dividend aristocrat status. The company should therefore not be overwhelmed by debts.

However, the current price trend leaves the company with a tense balance sheet and little growth. Until AT&T knows how to grow its sales and earnings, it could continue to be difficult to make the stock attractive.

The article 3 reasons why AT&T shares will continue to stagnate was first published on The Motley Fool Germany.

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The Motley Fool owns shares of and recommends Amazon and recommends T-Mobile US and Verizon. Will Healy has no position in any of the stocks mentioned. This article appeared on on April 28th, 2021 and has been translated for our German readers.

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