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Sizing Up AT&T Stock after the Time Warner Merger

The Time Warner buyout hasn’t moved the needle for AT&T stock yet. Some doubt it ever will. Those people are forgetting the impact of its DirecTV buyout.

ATT Time Waner Merger

Earlier this month, a federal judge approved an $85 billion proposed merger between AT&T (T) and Time Warner. Naturally, it was deemed a major victory for AT&T. But how will the deal impact AT&T stock in the long term?

AT&T Stock Post-Merger

So far, the short-term impact has been negative. AT&T stock is actually down in the two weeks since the deal was approved. Going back much further, T stock has fallen 15% since the deal was first announced way back in October of 2016 (yes, that’s how long this mega-merger was pending). At 31 per share, T is trading at its lowest point since 2014.

That’s odd, considering AT&T is an entirely new company now that the largest pay-TV provider and second-largest cell-phone service provider in America owns the third-largest media and entertainment conglomerate in the world. Time Warner’s many assets include HBO, CNN, TBS, TNT, the Cartoon Network, Warner Brothers and DC Comics. There’s a natural synergy in the nation’s largest pay TV provider owning many of the channels it provides—at least according to AT&T CEO Randall Stephenson.

Most Wall Street pundits aren’t buying it. Many insist AT&T grossly overpaid for a company whose sales are down 40% from their 2007 apex, including a 3% revenue dip in the first quarter. That’s why the deal hasn’t moved the needle at all for AT&T stock. Big mergers have a tendency to create an outpouring of positive or negative headlines for the companies involved, and in this case AT&T is bearing the brunt of the latter.
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Eventually, however, the dust will settle, and we’ll see how the new AT&T fares. Having the merger finally approved was a good first step.

As for AT&T stock, you don’t have to look back too far to see what kind of impact an expensive buyout of a major company can have on shares. In July 2015, the government signed off on AT&T’s $48.5 billion bid to buy satellite television company DirecTV, thus creating a pay-TV behemoth that has since supplanted Comcast (CMCSA) as the nation’s largest (for now).

Here’s what T stock did after the DirecTV deal was completed:

AT&T stock has struggled of late, but it reacted well to the company's last major merger (with DirecTV).

The stock was up 23% in the year that followed, handily outpacing both the S&P 500 and the Nasdaq during a period of relative churn for the broad market.

Granted, it’s not an apples-to-apples comparison, but DirecTV was another heavily criticized big ticket item for AT&T, especially after the satellite TV giant had lost 133,000 subscribers in the last full quarter prior to that 2015 deal. In the four quarters after the deal was completed, DirecTV added 1.2 million subscribers—a rare 6% increase at a time when the pay-TV industry is slipping amid rampant cord cutting.

It seems like AT&T knew what it was doing then. And by “overpaying” a year later for Time Warner, it surely has something up its sleeve with all those cable channels under its umbrella. The $583 million AT&T shelled out for a 10% stake in Hulu in 2016 was its first move into the ever-expanding world of online streaming. And that’s exactly what AT&T has in store for all these Time Warner-owned cable companies.

So, Is T Worth a Flier?

In the meantime, trading at four-year lows, AT&T stock can be had for a good value (it trades at 9.2 times forward earnings estimates), offers a very strong dividend (6.3% yield), and expects an 11% increase in EPS this year. That’s not a bad start for a cheap stock.

That said, I’d wait for the stock to scrape itself off the mat before even considering it. But like DirecTV, Time Warner is a big get for AT&T. We’ll see if it eventually attracts buyers to AT&T stock the way the DirecTV deal did.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .