At a debt-to-equity of below a one-time multiple (0.96 times), investors had no hesitation selling AT&T (NYSE:T) stock in the last half-year. The stock is down 6% in that time and down 27% year-to-date.
The media unit, WarnerMedia, needs movie theatres reopening. Yet risks are mounting for the entertainment industry. The pandemic is a risk factor again and will delay the recovery in the blockbuster movie business. How might AT&T manage its debt and the cash burn from media?
DirectTV is a non-core asset for AT&T. If the company attracts in the 3.5 times EBITDA or a valuation of $15.75 billion, it would give the telecom firm the extra cash needed to lower its debt. Interest rate costs are low but the added debt load and the negative cash burn from WarnerMedia is a bad combination. AT&T’s CEO assured investors it would raise its payout ratio by 10% if it needed to, just to sustain the dividend yield.
Investors are better off having a more efficient firm that sells off non-core assets, pays down debt and keeps WarnerMedia lean until the movie industry recovers. A 20% job cut is excessive. It is also a step back and undermines the acquisition.
AT&T needs to balance its future growth prospects with current cash burn rates. As investors get a clearer picture, they will get more comfortable holding the stock.
