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Contrarian Signs Point to Possible AT&T Bull Case

InvestorPlace - Stock Market News, Stock Advice & Trading Tips Although AT&T disappointed with its massive dividend cut, there are some posit...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Investorplace.com - InvestorPlace

Let’s start off with the harsh facts: AT&T (NYSE:T) has been a disappointment. As a T stock investor, I’ve personally felt the paid. While the telecom giant attracted contrarians when it dipped in late 2018, the novel coronavirus pandemic took the wind out of the company.

A photo of an AT&T office building.
Source: Roman Tiraspolsky / Shutterstock.com

Yes, on one hand, T stock was a beneficiary of the public health crisis due to the underlying high-speed internet and mobile communications services. With millions of white-collar workers engaging in the world’s make-shift remote operations experiment, connectivity — already a smoldering topic — caught fire.

But you know what else took the heat in a not so positive manner? Corded entertainment. As you’ll recall, The Wall Street Journal reported record-breaking cord cutting in spring last year as businesses — particularly sports bars and hotels — put their subscriptions on pause. So, too, did regular consumers, with many abandoning paid-TV services due to the uncertainties of live sporting events.

Therefore, in some respects, it wasn’t too surprising that AT&T and Discovery (NASDAQ:DISCA) announced a deal a few months ago “to combine WarnerMedia’s  premium entertainment, sports and news assets with Discovery’s leading nonfiction and international entertainment and sports businesses to create a premier, standalone global entertainment company.”

Holders of T stock will receive shares “representing 71% of the new company” while “Discovery shareholders will own 29%” of the enterprise. That’s a positive for those who took a chance on AT&T. This way, they don’t have to choose between the core telecom business and some high-potential components of the entertainment business, which includes the relevant HBO Max brand.

But this came at a cost — roughly a 50% haircut on the dividend yield, a pivotal reason to own AT&T stock. Can the telecom recover from this mess?

Signs of a Long-Term Bull Case for T Stock

In early August, Barron’s reported that a giant pension fund made changes to its allocation for the second quarter, which including increasing its position in T stock. The State of Michigan Retirement Systems also increased its stake in Gilead Sciences (NASDAQ:GILD) and Qualcomm (NASDAQ:QCOM).

However, the fund also raised eyebrows for the shares it reduced exposure to, in this case, AT&T rival Verizon Communications (NYSE:VZ). When Barron’s asked for the reasoning behind the reshuffling, the Michigan Department of Treasury — which heads the agency that oversees the pension — stated that it doesn’t discuss active investments or related strategies.

Still, that’s got to feel good for those holding the lackluster T stock. Pension funds aren’t exactly in the business of losing money and they represent a political fireball for multiple individuals and organizations.

Also, it’s not going unnoticed that T stock at the present rate is undervalued. According to data from Gurufocus.com, the company’s Shiller PE ratio is 12.5 times, which is better than nearly 72% of telecom firms. And by the way, that also includes Verizon, which has a Shiller PE of 13.7x.

Admittedly, these valuation numbers will do some shuffling of their own once the aforementioned business spinoff finishes officially. However, it’s also fair to point out that present investors in T stock won’t take a total hit since they’ll own significant equity in the spinoff. Also, even without the entertainment arm, AT&T will likely trade at an attractive discount — at least attractive for contrarians.

Finally, investors ought to watch the professional market closely. While I’m personally leaning toward a majority return to the office, it’s not so cut and dried. Some positions may offer telecommuting extensions. And the workers themselves want flexibility on this issue, which would support AT&T’s internet service business.

Wrong Time To Spin Off?

As someone who has seen the ebb and flow of T stock up close and personal, this isn’t going to be an easy bet. Primarily, the pandemic appears to have substantially accelerated at-home entertainment trends. If so, AT&T may have chosen the wrong time to spin off its entertainment assets. As well, the return of sports would have helped shore up this space.

Therefore, the bullish case of T stock is a contested one. However, it must be stated that the telecommunications and internet services industries will become even more relevant. It’s not just about post-pandemic workplace standards but the rise of the gig economy. So there’s plenty to like with AT&T if you can stomach the near-term noise.

On the date of publication, Josh Enomoto held a LONG position in T. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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