After weak 2020, 5G push and debt reduction top AT&T’s agenda

When the virus outbreak crippled global markets last year, telecommunications companies stayed relatively less affected but there were exceptions. AT&T, Inc. (NYSE: T), which ended 2020 on a weak note, is currently focused on investing in the growth areas of the business, after the unimpressive launch of streaming service HBO Max.

Of late, the Texas-based telecom behemoth has been busy expanding its fiber footprint amid growing demand from customers. The initiative is crucial at a time when businesses are rapidly increasing their digital capabilities to align with the shift in operations, brought about by the pandemic. AT&T’s stock has remained almost flat in the past several months, all along underperforming the market. While analysts expect the stock to gain about 6% this year, they are cautious in their recommendations.

Customer Growth

Supported by continued investment in wireless services, including 5G, amid the virus-driven demand growth, AT&T’s mobility customer base expanded significantly in the second half of 2020. The stable subscription business generates sufficient cash flow to take forward the expansion plans and capital return program.

Though earnings topped expectations quite often in the past, the trend was not consistent. In the final months of fiscal 2020, adjusted profit decreased in double-digits to $0.75 per share but beat the Street view. At $45.7 billion, revenues were down 2% as a modest increase in the core communications business was more than offset by weakness in the Warner Media and Latina America segments.

Focus on Cost-cutting

When it comes to improving the bottom-line performance, the bright spot is the management’s aggressive cost-cutting measures, though it is yet to yield the desired results. The efforts to streamline the business by trimming the real estate footprint and reorganizing the product portfolio, which got complicated after continuous expansion, should have a positive effect on margins going forward.

The ongoing growth initiatives assume importance considering the lackluster launch of HBO Max, mainly due to the pandemic-related disruption that affected the movie business. Also, the company that is among the first to roll out 5G services is facing stiff competition from T-Mobile (TMUS) and Verizon (VZ).

Meanwhile, the initiatives to monetize non-core assets and to use cash flow to repay the debt will strengthen the balance sheet. AT&T has hiked dividends consistently in the last few years.

From AT&T’s Q4 2020 earnings conference call:

“In fact, we finished the year with our total dividend payout ratio at a very comfortable level. And on debt management, we made material progress in 2020 by reducing debt maturities over the next five years by about 50% and lowering our weighted average interest rate on debt to about 4%. We continue to transform the business to drive efficiencies. Our cost-cutting initiatives generated about $2 billion in savings in 2020, dollars we invested back into the business to drive subscriber growth and move our transformation initiatives forward.”

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Read management/analysts’ comments on AT&T’s Q4 earnings

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Shares of AT&T closed the last trading session slightly below the $30-mark, which is down 1.17%. In the past twelve months, the stock dropped about 14%.