When AT&T (NYSE:T) announced it would spin-off its HBO asset, income investors dumped the stock in droves. T stock spent the first half of the year holding the $30 line. In the second half of the year, markets punished investors who held the stock.

The media unit spin-off is not the only confusing action hurting the telecom firm’s prospects. The core mobile business risks slowing down.

Slowing User Growth Pressures T Stock

Communications Chief Executive Officer (CEO) Jeff McElfresh recently spoke at a Wells Fargo (NYSE:WFC) conference. In his presentation, he said that AT&T posted its best subscriber growth in the last five quarters. This is the best in a decade. The company has a strategy for lowering churn rates and increasing customer lifetime value.

According to Seeking Alpha, “the company’s ‘three key elements’ – simplified plans and targeted sub-segment approach, improved customer experience and network performance – are leading to lower churn and increased customer lifetime value.”

Additionally, since its introduction, 5G would offer its customers excellent service quality and speed.

For its corporate customers, demand for the enterprise private 5G networks is growing. Companies realize they need better performance than that offered by WiFi networks. AT&T is building software and infrastructure to meet those needs. CEO John Stankey said the company is in a good position in this competitive market. He continued that the company is coming off a year driven by higher volume. This includes some government stimulus, the post-pandemic world, and changes in behaviors.

AT&T issued conservative guidance for the year ahead. It expects subdued gross additions in the marketplace. Despite slowing user growth, the average revenue per user is very stable.

Catalysts

In 2022, AT&T does not have many cost-cutting distractions. It will complete the HBO Max/Discovery merger in the first half of the year. After that, management will focus on moving AT&T forward. For example, it will raise plenty of cash from the stock sale to pay down its current debt load.

AT&T’s heavy debt is like an anchor holding the stock back. Inflation rose to 6.8% in November. The Federal Reserve is now behind the curve on meeting its mandate of stable inflation. It may raise rates abruptly in a panic next year. Before that happens, AT&T needs to lower its debt to cut its interest rate costs.

The company will leverage its distribution in both business and consumer markets to fuel growth. It has a superior network that it may price at lower levels than the competition. In addition, AT&T invested heavily in FirstNet, an “innovative public safety communications platform will bring 21st century tools to public safety agencies and first responders.” This increases its addressable market in the public sector.

AT&T also invested in fiber in 2020. Now, it has a chance to co-market and sell its products and services in the consumer space. Churn rates are falling, thanks to improved customer service. The company may have forecasted a light customer growth rate. But as customers choose its 5G network and appreciate its better customer service levels, AT&T could report strong customer acquisition growth in the next year.

On Wall Street, five out of nine analysts are neutral on the stock. According to Tipranks, the average price target is around $29.

Tailwinds

AT&T has a strong track record of sustaining average revenue per unit. It has the flexibility to adjust phone plan pricing to spur sign-ups. For now, people are not rushing to buy the latest phone and to get the best mobile plan. With the ongoing pandemic, they are redeploying their device in the household. Until that trend changes, AT&T does not need to aggressively market the most lucrative offers.

Only around 20% of AT&T’s subscriber base is on its unlimited plans. Eventually, Covid vaccine uptake will rise in the U.S. The flu season will end in a few months, too. At that time, people will probably want to upgrade their AT&T plans.

Risks

Shareholders did not expect AT&T would fall to a 12-year low on Nov. 30. Tax-loss selling probably added to the selling momentum. In the new year, investors who want a piece of the HBO/Discovery stock dividend and AT&T’s generous dividend will buy the stock at current levels.

AT&T’s heavy debt load is at risk of costing more to service. Management recognized the costs and sold non-core business throughout the year. It also sold its TV distribution business, DirecTV. The unwinding of the WarnerMedia assets will add $43 billion to AT&T’s balance sheet.

Your Takeaway on T Stock

At a stock price not seen in over a decade, AT&T is in the bargain bin. Value investors seeking stable high dividend payments will flock to T shares. Consider accumulating the stock at current levels. The discount may not last long as it could surge ahead of the HBO/Discovery separation. The markets are valuing the media assets at a steep discount. Once it trades separately, those shares could rise, too.

— Chris Lau

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Source: Investor Place