The Stockles Risk Rating is created with the purpose of getting to know the business. I believe the best way to stay rational and calm in a stressful market is to know what you own and know what it’s good for. This Risk Rating is not absolute and a company can fit my portfolio even if a few questions are negative. I do a Risk Rating every time I buy a new company to make sure I know what this partnership truly means.

About the Company

1. Geopolitical Risk: Is this company free of meaningful geopolitical risk?

Answer: Generally, no. There is some geopolitical risk in Latin America, in particular.

2. Market Cap: Is the market cap greater than $1 billion?

Answer: Yes

3.Repeat Business: Does the business have high repeat customer usage?

Answer:  Yes. AT&T operates within 4 segments: Business Solutions (40% – Wireless, Legacy Voice, and Data governmental with around 3 million businesses).

Entertainment (30% – Video and audio channels to 25 million subscribers,  broadband and internet to 13 million connections in 60 countries).

Consumer mobility (20% – wireless, roaming, devices).

International (4% DirectTV and Sky in Latin America. Also, wireless subscribers).

In total AT&T has around 80 million postpaid customers, and 14 million pre-paid. AT&T monthly churn rate is the lowest in the industry. Together with Verizon, AT&T leads the wireless market. It’s also the leader in Pay-TV, with DirecTV beating Comcast, Verizon, and Dish.

4. Brand 1: Does the company have brand strength with passionate advocates?

Answer: Yes. One of the major four: AT&T, Verizon, T- Mobile and Sprint.

5. Brand 2: Does the company’s business rely on recognizable branding truly valued by its buyer base?

Answer: Yes. Since customers will want the best wireless… they will focus on getting the maximum out of their purchase. Unlimited data-plans are sexy, and AT&T offers a $90 unlimited plan that continues to gain subscribers thanks to the company bundling a $25 Pay-TV discount, as well as offering free HBO (a Time Warner company). AT&T gets top ranks in customer service.

6. Safety: Is the Safety Score from SSD more than 75?

Answer: Yes

7. Growth: Is the Growth Score from SSD more than 75?

Answer: No

8.Yield: Is the Yield Score from SSD more than 75?

Answer: Yes

9. Is the company recession-proof?

Answer: Yes. AT&T dropped 45% during the financial crisis, but sales only decreased -0.9%

Financials

10. Does the company have a recent record of revenue growth (Revenue CAGR) that’s any good? 

Answer: It’s lagging the market by 2-5% during the last 5 years.

11. Growth: Did the company increase its sales by 10% to 40% annually in the previous three years?

Answer: No. Sales growth is normally around 1-3 %

12. Profitability: Was the company profitable during the past year? 

Answer: Yes

13. Consistency: Has this company shown consistent profits in each of the last five years? 

Answer: No. Profit ranges from 4% to 12% in the last 5 years

14. Cash Flow: Was the company cash-flow positive for the previous quarter? The last 12 months? Two of the last three years? 

Answer: Yes

(Source: SimplySaveDividends)

15. Diversification: Is the company free of any customer or supplier that accounts for more than 10% of sales? 

Answer: Yes

16. Independence: Can the company execute its business plan without relying on external funding? 

Answer: Unsure. In this capital-intensive industry, it’s important to always make purchases. With the Time Warner Deal, AT&T needs to collect a lot of debt. Time Warner will probably add a lot of value to the pipeline (in the long-term), but in the short term, unsure.

17. Leverage: Is the company’s debt-to-equity ratio of less than 1.0?

Answer:  No. It’s 1.16

19. Current Ratio: Is the current ratio more than 1.0? 

Answer: No. 0.90. Might need to raise cash to meet short term obligations

 20. Net Debt / EBIT: Is the Net Debt / EBIT lower than 2.0?

Answer: No. Very high at 5.5

21. Financial Transparency: Are the financials easy to understand? 

Answer: Yes.

22. Return on Equity: Is the ROE/ROIC greater than 12% each year for the past five years?

Answer: No.

Dividend

23. Yield: Does the company yield more than inflation?

Answer: Yes

23. Dividend CAGR: Is the CAGR more than 5%?

Answer: No. 1 year is 2%. 3 years is 2%. 5 years is 2% and 10 years it’s 3%

24. Payout Ratio: Is the payout ratio less than 70%?

Answer: No. It’s normally around 50% to 70%, but now 91%

25. Dividend status: Is the company a king, aristocrat, contender…?

Answer: Dividend Aristocrat

The Competition

26. Underdog: Is it free from stronger competitors?

Answer: Unsure. The only major competitor is Verizon and T-Mobile. The market is very capital intensive and it’s hard to operate on the national level. Also, the market is very mature. Hard to grow.

27. Goliath: Is it free from disruptive upstarts?

Answer: Unsure. In TV, companies such as Netflix cause competition, but not on the wireless part, only on content.

28. Moat: Are there signs of strong competitive advantage?

Answer: Yes. Switching costs are very high. Mature market. Extremely capital intensive

29. Is the company likely to avoid disruption and see most of its key markets continue?

Answer: Yes. But the potential merger between T-mobile and Sprint is dangerous,

30. Is the company Amazon-Proof?

Answer: Yes

The Stock

31. Market Cap: Does the stock have a market cap of more than $750 million?

Answer: Yes

32. Beta: Is this stock’s beta less than 1.3 for the past 12 months?

Answer: Yes

33P/E ratio: Does the stock have a positive price-to-earnings multiple that is less than 30?

Answer: Yes

34. Forward P/E ratio: Does the stock have a positive price-to-earnings multiple that is less than 30?

Answer: Yes

35. P/B ratio (financials): Does the stock have a price-to-book multiple around 1?
36. Forward P/B ratio: Does the stock have a price-to-book multiple around 1?
37. P/S ratio (growth): Does the stock have a price-to-sales multiple around 1 – 2 or less than 1?
38. Forward P/S ratio (growth): Does the stock have a price-to-sales multiple around 1 – 2 or less than 1?

Management

39.Insider Stake: Do founders and top executives have at least a 5% stake in the company?

Answer: No

40. Management: Is management trustworthy? (Do they do as they say, ROE, ROIC, Capital Structure, Long-term Stock Price growth, and Risk Control)

Answer: Yes. Management has shown that they care about shareholder return while being risk-averse. The ROIC is positive and the Time Warner should benefit the pipeline.

(Source: SimplySaveDividends)

Conclusion

  • AT&T should be seen as a bond-substitute. One should expect around 5% dividend return and 2 % earnings growth. AT&T is quite special since it operates in a very matured market and there is very little growth potential. Few investments were the dividend return is the main driver, should be considered for a future-oriented investor.
  • There are two main issues with AT&T: The potential risk of increased potential from Verizon and a merger between Spring and T-Mobile. This will cause even lower earnings growth, and therefore put the fair price for AT&T lower. The main issue is the deal with Time Warner. Here, we just have to trust the experienced management and that the debt is controllable. This deal can go many ways, and if there will be no deal, I’m sure the market will react negatively.
  • My cost basis for AT&T is $34. I think it’s very important not to overpay for this company. We saw that AT&T dropped as much as 45% during the financial crisis and even though it recovered, the paper loss was significant. On a historical basis, fair value is probably around $40-45, but keep in mind that a margin of safety is needed because the limited growth is dangerous, and the deal with Time Warner can go many ways. Rising interest rates put pressure on AT&T as well.

If you liked this risk rating and want more, subscribe to this blog and you will be notified whenever I do another risk assessment 

Take care,

Stockles

 


6 Comments

Mr. Robot · April 17, 2018 at 9:30 am

I think this is a great analysis! The only thing issing (or I missed it) was your own general conclusion or actionable item(s).

Thanks for sharing!

    Stockles · April 17, 2018 at 10:06 am

    Thanks for the comment. I’ll write a conclusion when I get back home!

Mr. ATM · April 17, 2018 at 5:25 pm

I think you did a pretty thorough job with identifying all the fundamental metrics that make up the quality of a given stock or a company. However, it is a lot of work to review or regularly track all these metrics and most individual investors would not monitor them on a regular basis and why we have subscription services like SSD to spit out a single safety score. Most people are lazy when it comes to investing and want someone to tell them what to buy/sell.

Regarding risk, I like and follow the advice in this paragraph from the book “Single Best Investment” :

“In a real investment—as opposed to a speculation—your analytic process
has already reduced the chances of permanent loss of some or all of your
money to statistical unlikeliness. In other words, if you choose generic
“growth stocks” or “index funds” as your investment, if you choose “real”
investments with “investment quality” (as determined by the credit ratings
agencies such as Standard and Poorʼs, for example), the issue of losing your
money forever isnʼt really the right understanding of risk.”

timeinthemarket · April 21, 2018 at 6:33 pm

I somewhat like T in the low 30 range($32 or so). It has dipped near there recently and might again with this new lawsuit. It’s not a growth company but it is a relatively stable dividend payer.

One thing I don’t like is the massive debt expansion we’re seeing now. That’ll take a while to pay off!
timeinthemarket recently posted…The first $100,000 is the hardest – the miracle of compound interestMy Profile

Erling · April 22, 2018 at 7:45 am

Thank you for your writeup! I might use a lot of the items for my own investments.

The only thing I wonder is why you bought the company when it does not meet the standards of your checklist. The debt level seems too large, especially for a dividend stock. Also, the growth is much less than your demand in the checklist. If you do have a checklist like this, shouldn’t it actually affect whether you invest in the stock or not? At least I would like to see your reasoning for making the investment despite low growth and high debt.

DividendNose · April 26, 2018 at 7:49 am

Hi, Master Stockles

As always – a pleasure to read and learn from you sharing your view on the world.

As a newbie I would love for you to add a short description on each of your areas in Risk Rating – answering the simple question: Why is this important to my insight as an investor?

And then another wish – if you find the time it would be highly appreciated if you could highlight how you get to e.g. the $34 price tag for ATT.

Keep it up – I love following your journey to support my own.

All the best
TheNose

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