AT&T’s Big Business Reversal ... and What It Means to Investors

It’s no secret that I actively follow dividend stocks and what’s going on in the 5G race. So, it’s no surprise at all that I’ve been keeping an eye on AT&T (NYSE: T).

Last week, the company announced a $43 billion deal to merge its WarnerMedia assets with Discovery, Inc. (Nasdaq: DISCA). The hope is that the combination of these iconic brands will offer the most differentiated content portfolio in the world.

Upon completion of the deal, AT&T shareholders will receive 71% of the new company, leaving Discovery shareholders with 29%. It also results in two independent companies: this new media company and a broadband connectivity company.

Essentially, AT&T will go back to the pure play it was prior to 2015 when it acquired DIRECTV, then Time Warner a few years later.

Something interesting happened to its Weiss Ratings standing around the same time.

Up until that point, AT&T was a “buy”-rated company that would occasionally dip to a “C+”. Since the end of 2017, it has stayed in the “hold” range, breaking through to a “B-” every so often. Currently, it’s sitting at a “C-”, the low end of this “hold” range.

Going back to a pure play might just be the move it needs to see increased strength in its balance sheet ... and a recovery in our ratings.

Still, income investors will surely be fleeing the stock.

That’s because AT&T announced it would reduce its payout ratio after the deal is finalized, equating to an anticipated dividend cut of about 40%. And as these investors flee, we could see the share prices plummet ... at least short term. We might even see a “sell” rating trigger depending on how all the numbers shake out.

So, where should you look if you want to get in on the 5G or streaming video on demand (SVOD) trends without the volatility of AT&T?

The big winner at the last 5G spectrum auction was Verizon (NYSE: VZ), which claimed 3,511 of the 5,684 licenses up for grabs.

Right now, Verizon is the only one of the big three carriers that has a “buy” rating. And since mid-2018, the company has only dipped into the “hold” range twice, and both times for only a brief period: 32 days and 15 days, respectively.

Shares are up 8.5% over the past year, and investors can lock in a 4% dividend yield, making Verizon the most attractive 5G player right now.

But that doesn’t mean you should ignore T-Mobile US Inc. (Nasdaq: TMUS) completely, as it just might have the most complete 5G spectrum portfolio thanks to its acquisition of Sprint last year. The company has held a solid “buy” rating since 2015 ... until this past February when it slid to a “C+”.

The company’s earnings per share (EPS) slid, and net income declined by 40%. These are definitely warning signs, as the company doesn’t appear as solid as Verizon. Plus, there’s no dividend to reward its shareholders.

What about streaming? Would it be a good idea to get shares of AT&T just to get shares of this new combined streaming company when it hits the market?

Right now, Discovery has a “hold” rating, and its shares are down 42% over the past three months. Discovery+ only has roughly 15 million subscribers. For comparison, Netflix, Inc. (Nasdaq: NFLX) has 200 million, and Disney+ has 100 million.

That’s a lot of ground to make up.

Netflix also has a “hold” rating right now. Shares are down 6.9% over the past three months. The Walt Disney Co. (NYSE: DIS) isn’t a pure streaming play, of course, so there’s more than just Disney+ affecting its performance and rating. Still, it has the lowest rating out of these three. Shares are down 6.8% over the past three months.

Of all the choices above, Verizon looks to be in the best shape right now. And personally, I wouldn’t touch AT&T until we see how it and its dividend fare on the other side of this deal.

Luckily for you, it’s easy to add these and any other companies you’d like to follow to your Weiss Ratings watchlist. SVOD services and 5G are two trends that are still moving full speed ahead into the future.

By adding these to your watchlist, you’ll get email updates when ratings change. And that just might put you ahead of other investors on this wild ride.

Best wishes,

Kelly Green