AT&T Sees Wireless Stability, Stock Remains Attractive

AT&T’s T second-quarter results were broadly in line with our expectations, given the various impacts of the pandemic on its businesses. The wireless business, its most important, produced stable results despite modest customer losses and weak revenue per customer. Notably, the firm disclosed that HBO Max activated 4.1 million new domestic accounts (in addition to 23 million HBO accounts that migrated to Max) from its May 27 launch through the end of the quarter, somewhat underwhelming in our view. Free cash flow through the first half of 2020 was down about 20% year over year but is on pace to meet management’s targeted dividend payout ratio (in the 60% range for the year). Free cash flow during the quarter was adequate to fund the dividend and a $1 billion spectrum purchase while also allowing for a $2.3 billion reduction in net debt (to $152 billion). We don’t expect to materially change our $37 fair value estimate or narrow moat rating; we believe the stock is attractive.

The wireless business lost 151,000 net postpaid phone customers during the quarter, its first loss in more than two years, though this figure includes the reported loss of 338,000 nonpaying customers that are still receiving service under the Keep Americans Connected pledge. Reported customer churn declined year over year despite the uptick in customers struggling to pay their bills. Revenue per postpaid customer declined nearly 2%, which AT&T attributed nearly entirely to reduced international roaming. Management indicated that it has actually seen customers trading up to higher service plans on average, attributing this trend to tie-ins with HBO Max. Total wireless revenue declined about 1% year over year, but the segment operating margin ticked up nearly 1 percentage point, lifting segment operating income about 1%. Customer activity was stronger than we had expected given the pandemic, with phone activations down only slightly versus a year ago, limiting margin expansion.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.