The Fed’s 50 basis point rate cut should help the most indebted companies. AT&T (NYSE:T) is one such firm that should benefit. Its variable debt and debt coming due will cost less to refinance, improving cash flow. So, why might AT&T stock still be more attractive only if the stock falls a few dollars more to the $32 range?
AT&T has a massive $151 billion debt, as the WarnerMedia unit will hurt the balance sheet for the foreseeable future. But CEO John Stankey posted a shareholder update that will see $4 billion worth of its stock retired. Not only will this help its earnings per share (EPS) but the lower share count will cut dividend costs.
Fundamentally, buying media to diversify away from the core telecom and the wireless market is a smart move. But practically, the timing is becoming worse. COVID-19 fears in the United States and worldwide will curtail the consumption of entertainment content. Still, higher isolation and fewer visits to the movie theatre might increase demand for HBO Max. And as it lifts demand for Netflix (NASDAQ:NFLX) and Comcast (NASDAQ:CMCSA) online streaming, AT&T may benefit from this trend.
Valuation is still a headwind for AT&T stock at these levels. At nearly 20 times earnings, investors could buy Verizon (NYSE:VZ) at better valuations (~12 times earnings). Investors do not have enough confidence that AT&T will grow cash flow from mobile subscriptions and its entertainment division. As such, patient investors may have a chance to get the stock at $32.
