Traditionally, telecom stocks like AT&T (NYSE: T) were viewed primarily as income vehicles. AT&T stock is the quintessential “widows-and-orphans” issue, because it generates steady profits each year like clockwork. It then returns a great deal of its earnings to investors as a high dividend yield.
AT&T is a Dividend Aristocrat. It recently increased its dividend for the 33rd year in a row and has a 5.3% dividend yield.
In turn, AT&T is not known as a growth stock. Its earnings growth in recent years has only been around the rate of inflation.
But AT&T is making moves to break out of its image as a lumbering giant. Going forward, it has its eyes on growth. The company announced a huge potential acquisition of Time Warner (NYSE: TWX).
AT&T could soon become a giant in content as well as telecommunications. AT&T may be a buying opportunity for growth as well as for its reliable dividends.
AT&T Dials Up a Huge Deal
AT&T has come to an agreement in principal to acquire Time Warner in a massive, $108.7 billion deal, including Time Warner’s debt. It values Time Warner for $107.50 per share. Both AT&T and Time Warner stock have dropped in recently, as investors are clearly skeptical that the deal can pass regulatory approval.
The regulatory hurdle is indeed high. The telecommunications and media industries are both highly concentrated as it is, so this deal naturally raises red flags.
But if the deal does get done, it would be a huge opportunity for AT&T. First, it will broaden AT&T’s scope. AT&T is currently a giant in the telecommunications industry, but it does have some weaknesses. For one, AT&T stands to be a big loser from the “cord-cutting” phenomenon. This is a trend in which consumers drop their higher-priced cable packages, in favor of cheaper skinny bundles and streaming services like Netflix (Nasdaq: NFLX) and Hulu.
By acquiring Time Warner, it gives AT&T a strong foothold in content. Time Warner is a media giant, with valuable cable properties including TNT, TBS, and CNN, among many others. It also has premium channels HBO and Cinemax. Time Warner’s premium networks alone have 49 million subscribers. In addition, Time Warner owns the Warner Bros. movie studio.
In addition, the potential for innovation is compelling. AT&T will be able to deliver high-quality content to its more than 100 million customers on every screen, whenever the customer wants it. AT&T has excellent direct-to-customer distribution across multiple channels—television, broadband, and mobile.
The acquisition makes sense from a strategic standpoint. The deal would provide valuable diversification for AT&T, as well as opportunities for growth. Not only that, but the takeover makes sense from a financial perspective as well.
Growth Opportunities and a Content Role
There are significant financial benefits for AT&T. It will be able to lessen the capital intensity of its operations. AT&T expects the deal will be accretive in the first year after it closes thanks largely to cost synergies.
In addition, there is an opportunity for revenue growth from addition advertising fees. Owning content will give AT&T valuable leverage over advertisers. Higher fees as well as revenue from subscriptions will also help alleviate the high cost of creating content.
It will also bring about significant growth opportunities, which AT&T could use. AT&T’s revenue grew 4% last quarter. AT&T passes along the bulk of its earnings in the form of a 5.3% dividend yield. But its payout ratio is getting tight—AT&T distributed 83% of its earnings per share to investors over the past one year. Time Warner’s growth will help AT&T improve its dividend coverage.
AT&T Stock: For Growth Investors, Too
AT&T stock has long been relied upon for its dividend, and that certainly won’t change going forward. What could change is that the potential deal between AT&T and Time Warner makes AT&T a worthwhile stock to buy for growth investors as well.
Between customer growth, higher advertising revenue, and expected cost cuts, the huge deal for Time Warner is a big win for AT&T and its shareholders.