Quick Value 1.6.20
Market Performance
[Index | Last week ==> This week | % change]
S&P 500 | 3240 ==> 3235 | -0.2%
Dow Jones | 28645 ==> 28635 | unch
Russell 2000 | 1669 ==> 1661 | -0.5%
Russell Microcap | 621 ==> 616 | -0.8%
10-Year | 1.88% ==> 1.80% | -8bps
Gold | 1516 ==> 1552 | +2.4%
Oil | 62 ==> 63 | +1.6%
VIX | 13 ==> 14 | +7.7%
Market Stats
Corporate profit margins haven’t been much help to earnings growth lately… may not be much help in the near future either… with inflation on the rise, tariffs, and the consistent upward trend in hourly wages, it may be tough to see margin expansion without price increases…
(Charts courtesy of JPM and Yardeni Research.)
Quick Value
AT&T ($T)
This is somewhat of a punt-on-third-down idea…
The wireless carrier completed its acquisition of Time Warner in mid-2018 for $85bn which added a hefty amount of debt on the $T balance sheet (which now stands at $165bn).
The Good
But… this is a business that generates plenty of cash. Free cash flow is expected to be $28bn in 2019 for a 10x multiple on the $285bn market cap.
On top of that, management is committed to focusing that cash on paying down debt by targeting 2.5x leverage by yearend 2019. After that, they intend to start up some share repurchases.
Lastly, the dividend at $2.08 per share is good for a 5.3% yield at current prices.
The Bad
This is not a growth business… prior to the Time Warner acquisition, gross cash flow has been flat for nearly 10 years in the $34-38bn range
Shares issued in the Time Warner deal also add to the dividend commitment which already consumes most of AT&T’s cash flow after capital investments…
In the end, you have an activist investor (Elliott Management) rattling the cages for some changes which AT&T management has acquiesced. If those plans wind up even remotely successful there could be more upside…
Even if the stock goes nowhere for 5 years and they continue the modest dividend increases ($0.04/share each year like clockwork), then 5-7% total return per year probably isn’t a bad outcome.