Continue Avoiding AT&T After Earnings Crater

In the last couple months, I’ve written two separate articles telling you to avoid investing in AT&T stock to Depression Proof Your Portfolio.

Today I give an update after it released its latest earnings and tell you why to – Continue Avoiding AT&T After Earnings Crater.

You can read the original articles in full at the links above.

But if you don’t want to; here’s a quick recap of why I said you should avoid AT&T to Depression Proof Your Portfolio.

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From Article #1 Linked Above

1 Reason To Avoid AT&T

It’s Got An Enormous Amount of Debt

Normally in these articles I talk about things like valuation, profitability, cash flow, the affects coronavirus is having on a company’s financials, among other things.

But frankly none of those matter with AT&T (T) due to its enormous debt load.

As of this writing AT&T is a $203.9 billion market cap telecommunications operator.

Its most recent quarterly data showed it has $16.9 billion in cash.  While it has $191.2 billion in short term and long-term debt and capital leases.

In other words, its debt makes up 93.8% of its market cap.

And its debt load is 10.3X higher than its cash levels.

I want to invest in safe stocks that will be around for decades to help me build wealth over the long term.  This helps insure I lose as little money as possible over time.

Typically, this means I invest in companies that have little to no debt compared to their cash and equity.

And I look to invest in companies with a debt-to-equity ratio below 1…

AT&T’s debt to equity ratio is at this number which means its fine right?  No.

When looking at AT&T’s financial statements you see that it has $299.3 billion in “intangibles and goodwill” on its balance sheet.

Intangibles are things like patents, licenses, trademarks.  These are valuable assets in AT&T’s case because they keep competitors away.

Especially the AT&T brand name which as of August 14th, 2020 is the 11th most valuable brand in the world at worth $105.8 billion.

What about goodwill?  Is that valuable in a real-world sense?

Not so much.

Goodwill is mostly an accounting figure – meaning most of the time it has no real-world value.

This is because goodwill is the excess amount a company pays to buy another company above its book value.

For example, if AT&T bought a company for $2 billion but its book value was $1 billion.  AT&T would record $1 billion in book value on its balance sheet as an asset.

Because this number has almost zero real world value, I discount – cut – 100% of this number from most stock evaluations I do.

And I’d do that here in AT&T’s case.

After removing the $143.5 billion in goodwill from its balance sheet, this leaves AT&T with $50 billion left over in book value.

Which decreases the debt-to-equity ratio to around 0 from the 1 you see on Morningstar.com.

While also increasing the total liabilities as a percentage of its balance sheet up to around 90% from 66.8% on Morningstar.com.

These are the more real-world debt numbers for AT&T.

And they show that investing in AT&T stock is enormously risky right now due to its huge debt levels.

They also show why AT&T is barely able to cover the interest payments on its debt with its interest coverage ratio of 3.05.

Anything above 1 shows the company can cover the interest payments on its debt with current profits and cash flows… But you want this number higher to bring true safety to an investment.

This enormous and growing debt makes AT&T stock enormously risky in these uncertain times.

For this reason, I recommend you avoid investing in AT&T and its 7% dividend.

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From Article #2 Linked Above

This thesis to avoid AT&T continued playing out on October 22nd, 2020 when it released its most up to date quarterly earnings.

  • Revenues fell 5.2% in the year-to-year quarterly period to $42.3 billion.
  • Earnings per share fell 22% in the year-to-year quarterly period to $0.39 per share.
  • And operating income fell 17.1% in the year-to-year quarterly period to $8.2 billion.

The coronavirus had a huge negative affect on AT&T’s business so far.  And with new cases now exploding in the United States and Europe there no relief in sight.

On top of this it still has $159 billion in debt compared to $10 billion in cash.

As I said in the last article… Lower revenues and profits with huge debt levels is a horrible combination that makes owning AT&T stock incredibly risky.

Nothing I saw in the most up to date quarterly report changes this.

Because this is continuing – combined with everything talked about in the original article – continue avoiding AT&T stock and its now 7.6% dividend.

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This thesis to avoid AT&T due to its high debt load continued to play out after it released its most up to date quarterly earnings on January 27th, 2021.

  • 4th quarter 2020 revenue fell in the year-to-year quarterly period to $46.8 billion.
  • 4th quarter operating income fell from positive $5.3 billion in the 2019 4th quarter to negative $10.7 billion this year.
  • 4th quarter net income fell from positive $2.4 billion in the 2019 4th quarter to negative $13.9 billion this year.
  • Full year 2020 revenue fell to $171.8 billion.
  • Full year 2020 operating income fell 77.1% to $6.4 billion.
  • And net income fell all the way from positive $13.9 billion in the full year 2019 to negative $5.4 billion in full year 2020.

Ouch.

What happened?

AT&T recorded a total of $16.8 billion of impairments in the quarter.

  • $15.5 billion came from having to write down assets related to its subsidiary DirecTV.
  • $780 million came from cutting production and “other content inventory.”
  • And $520 million came from the continued shutdown of theaters related to Covid.

The smaller amounts make sense because of the slow down in content creation for both movie and TVs due to the pandemic.

What about DirecTV though?

It lost 3 million more customers in 2020 due to people “cord cutting” and getting rid of their cable or satellite TV subscriptions.

This has been going on for years but is now accelerating due to the huge success of Disney+, Netflix, Hulu, AT&T’s own HBO Max and the various other streaming services out there.

But this causes a huge problem when it comes to goodwill which I alluded to above.

When a company overpays for an asset – in this case AT&T buying DirecTV for $48.5 billion back in 2014 – if that asset begins deteriorating the acquiring company must impair assets.

Which essentially with the stoke of a pen destroys part or all the value of that asset.

In this case $15.5 billion.

This lowers the book value of the company as mentioned in the first article above.

And it also lowers earnings, cash flow, and the value of the company overall as well.

This is why you need to be ultra-careful when a company has a lot of goodwill on its balance sheet and why I say almost 100% of the time goodwill is useless.

It also illustrates why you need to be wary of companies and how they allocate capital.

By overpaying for DirectTV back in 2014 – when cord cutting was just beginning but was already an established trend – AT&T not only wasted a lot of that money… But its now become a double-edged sword because its destroying even more value now.

In other words, by paying $48.5 billion for DIRECTV then – AT&T was already destroying value due to the fact of cord cutting beginning and accelerating… And it destroyed $15.5 billion more now with this impairment.

Poor capital allocation is a huge pet peeve of mine for these reasons.

And for this reason – and the ones in the earlier article – I recommend you continue avoiding AT&T… because more impairments and destruction of value like this are likely.

Click the links below to see the stocks we recommend to Depression Proof Your Portfolio and earn safe investment returns.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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