AT&T’s share price: What to expect in Q3 earnings

AT&T’s [T] share price is in trouble. Like most other stocks, the company saw a heavy selloff in March as the coronavirus ravaged the markets. While it mounted a subsequent recovery over the summer, AT&T’s share price has fallen over 10% since 28 August, and is now down over 30% this year. In stark contrast, rival Verizon [VZ] has gained over 13% since March, with losses of around 6% on the year.     

Shareholders will be hoping that upcoming third quarter results can turn things around for AT&T’s share price. Q3 saw the company continue to expand its 5G capabilities, while income-seeking investors will be looking out for a hike in the dividend. 

When is AT&T announcing Q3 earnings?

22 October

Why should investors care?

Little growth despite acquisitions

According to Seeking Alpha's Josh Arnold, AT&T has seen little revenue growth despite a number of expensive acquisitions. In the last quarter, revenue came in at $41bn, down on the first quarter’s $42.8bn. Arnold reckons these acquisitions have left AT&T lumbered with $8bn in annual interest payments.

"AT&T’s problem, quite simply, is that the tens of billions of dollars it has spent on acquisitions in the past several years just haven’t worked," wrote Arnold.

"AT&T’s problem, quite simply, is that the tens of billions of dollars it has spent on acquisitions in the past several years just haven’t worked," - Josh Arnold, Seeking Alpha

To improve its cash position, Zacks is reporting that AT&T will look to sell some of those expensive acquisitions. On the table is video game division Warner Bros Interactive, which it picked up for $4bn, and its stake in DirecTV satellite-television — both of which have been dragging on its core business. Any update on further plans to streamline its business could see AT&T’s share price move post-earnings.

Safe dividend

AT&T's share price might not be a growth play given how far it has fallen, but for income seeking investors the stock carries an 8.5% forward yield. Writing on Seeking Alpha, Bad Beat suggests that a hike could see an annual $0.04 dividend hike. Whether or not that happens will depend on AT&T's free cash flow.

"Well we are looking for free cash flow that comes in at $24 billion for the year, which leads up to project the payout ratio will be 61% for the year. This is a massive improvement from years past," writes Bad Beat Investing on Seeking Alpha.

Bad Beat argues that AT&T's stock "is among the safest 7.3% dividend-yielding stocks on the entire market." Bad Beat notes that AT&T is addressing its greatest headwind — namely its large debt pile, which at last count stood at $164.27bn. Some progress was made in Q2, with the company reducing debt by $2.3bn quarter-on-quarter. Shareholders will be looking for more of the same in Q3.

What is Wall Street expecting?

Wall Street is forecasting earnings of $0.76 per share in the third quarter, up from the $0.94 seen in the same period last year. Revenue is pegged at $41.61bn, a decline of 6.70% from last year's $44.59bn.

Of the analysts tracking the stock on Yahoo Finance, AT&T’s share price carries an average target of $31.96. Hitting this would see a 19.4% downside on the current share price (as of 20 October's close). Analysts at Deutsche Bank are more bullish, with a Buy rating on the stock and a $37.00 price target.

Among the bears is KeyBanc analyst Brandon Nispel. In October, Nispel cut his rating on AT&T to Underweight, with a $25 price target. Describing the stock as a “value trap”, Nispel noted that the company was "secularly and competitively challenged," with "few positive catalysts" other than offloading assets.

For income seeking investors, AT&T's share price could represent a bargain for one of the best dividends in the market. Those looking for growth will take some convincing, however.

AT&T share price vitals, Yahoo Finance, 21 October 2020