Stocks started the last month of the year in a down mood and slid on lousy manufacturing data. As analysts wonder whether things could get worse for the indexes in the rest of December, I’d like to discuss the short- and long-term outlook for telecom giant AT&T (NYSE:T) stock. Year-to-date, T stock is up about 30%.
Long-term, I am quite bullish on the outlook for AT&T stock. Yet, as many investors comb through their portfolios to decide what to do with this year’s winners and losers, I believe there is likely to be some short-term profit-taking in T shares.
How AT&T Stock’s Q3 Earnings Came
On Oct. 28, T stock reported a mixed bag of Q3 financial results. Although it beat estimates for adjusted earnings per share by a penny, it fell short of revenue expectations.
Management in part blamed the slump in sales numbers in the Warner Media segment for weakness in revenue. Our readers will well remember that in June 2018, a federal court approved the merger of AT&T’s $85 billion acquisition of Time Warner. Since then, AT&T’s earnings Warner Media segment includes HBO, Turner and Warner Bros.
Earnings and revenue streams are popular methods for investors to measure firm performance. Although AT&T stock’s Q3 release raised investor eyebrows, on the same day, the group also released its outlook for 2020 as well as the three-year guidance and capital allocation plan.
In 2020, management expects revenue growth of 1%-2%, adjusted EPS of $3.60-$3.70, and free cash flow around $28 billion.
The sweeping plans appeared to give several concessions to activist hedge fund Elliott Management, which had acquired about a 1% stake in the company earlier in 2019.
T stock jumped higher when the market opened the next day. And on Nov. 18, AT&T shares hit a 2019-high of $39.70.
5G Technology Will Likely Propel AT&T Stock in 2020
2020 will be the year when we all hear more of the growth and deployment of 5G, the next generation of mobile broadband that will eventually replace the current 4G LTE connection.
At the network level, AT&T and Verizon (NYSE:VZ) are the top contenders, followed by Sprint (NYSE:S) and T-Mobile US (NASDAQ:TMUS).
Earlier in the year, Verizon CEO Hans Vestberg said that half of US will likely have access to 5G in 2020 and that by 2024, 50% of Americans will likely operate 5G phones.
William Lehr of the Massachusetts Institute of Technology in September 2018 concluded that “Pervasive computing is a vision of everything, always (24/7) and everywhere connect(able) to networked digital communication, computing, and storage resources wherever and whenever wanted… [and] 5G represents an important step toward achieving this vision.”
He further highlighted several of the benefits of 5G as faster data rates, reduced latency, enhanced mobility, better connection density, and improved spectral energy efficiency. His study, which was supported by T-Mobile, acknowledged “there is a lot of hype associated with 5G.”
AT&T has a strong brand and wireless infrastructure — two factors that are likely to make it a dominant player in the 5G sphere.
Other Long-Term Tailwinds for T Stock
Media Business: The acquisition of Time Warner has turned AT&T into a media giant and a content power house. For example, HBO is one the assets that AT&T now owns, too. In the new year, management will launch HBO Max, a new streaming service with a wide range of programming.
In other words, with this new direct-to-consumer streaming service, AT&T can soon rival competitors, such as Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Walt Disney (NYSE:DIS).
In 2020, I expect the media business, including the HBO platform, to contribute to the earnings growth. further. It should also enable AT&T to increase its data-driven advertising revenues.
Dividends: T stock also offers a strong dividend yield at over 5.5%. Many investors regard AT&T stock as a reliable income generator in an era of low interest rates.
Recent research by Hao Jiang of Michigan State University and Zheng Sun and University of California, Irvine concludes that “[i]nvestors send more money to income funds posting higher dividend yields when interest rates are low.” As a result “high dividend stocks tend to have higher prices when interest rates fall.”
Furthermore, over the past three decades, the company has a history of increasing dividends every year. Therefore, the media giant’s dividend yield is likely to support the T stock price as institutional income fund managers as well as retail investors will be interested to keep shares like AT&T in their portfolios.
Short-Term Headwinds for AT&T
Trade Wars: On Dec. 3, President Trump warned that the U.S.-China trade war could go well beyond the 2020 election. As a result, stocks moved broadly lower.
Markets are always forward looking and this recent warning does not help alleviate investor concerns about the impact of tariff battles on company earnings.
If you aren’t already long T stock, you may want to remain on the sidelines until we have more clarity on the current trade war rhetoric.
Short-term Technical Charts: If you are an investor who also follows technical charts, then you may want to know that because of the recent impressive jump in the stock price, many short-term technical indicators have now become over-extended. Thus, T stock’s short-term technical chart is pointing to a near-term potential profit-taking.
AT&T shares are now hovering around $37. In the coming weeks, I expect the stock to trade between $32.50 and $37.50.
For December, the rally in AT&T stock looks done and psychology more than any other factor may drive the shares lower.
Bottom Line on T Stock
In the long-run, a given company’s financial performance is what determines its stock price. Therefore, I believe that AT&T’s earnings power through telecom and media-related operations will propel the T stock share price higher in 2020 and beyond.
However, in the next few weeks, some investors are likely to ring the cash register and take money off the table. Nonetheless, any such profit-taking would be a sign to investors to consider buying into T stock.
AT&T stock may continue to be volatile, yet as a buy-and-hold investor, you would collect over 5.5% in dividend payments, beating returns on many other investments.
As of this writing, the author did not hold a position in any of the aforementioned securities.