AT&T | Fundamental Analysis | LONG SETUP

AT&T stock is disappointing most experts and shareholders: telecom giant's evolution into the satellite TV and media markets, as well as lagging development in its wireless business, has driven its stock price to drop more than 40 percent over the past five years.

But there have been a few good aspects of the past year. AT&T slowly decreased its leverage by selling 30% of DirecTV, getting rid of WarnerMedia via a merger with Discovery, and selling other non-core assets to get fresh cash. The company's stock also rose briefly in January as increased interest rates made investors tend the securities again.

Between Jan. 1 and Jan. 18, AT&T's stock price increased 11%, while the S&P 500 fell 4%. However, AT&T subsequently squandered almost all of those gains as several worrying aspects emerged on the horizon.

At the beginning of the year, AT&T investors were unsure whether the company was going to spin off or split off WarnerMedia after the merger with Discovery.

In case of the spin-off, AT&T would distribute about 1.7 billion shares of Warner Bros. Discovery. Each investor would have received 0.24 shares of the new media company for each AT&T share they owned.

In a company split-off, AT&T investors would have been allowed to directly exchange all or part of their AT&T stock for Warner Bros. Discovery. Such an exchange would likely result in about 20 percent of AT&T's outstanding shares going out of circulation and would be tantamount to a massive share buyback for the remaining AT&T investors. But to persuade AT&T's investors to accept such an exchange, the company would probably have to offer its shares to Warner Bros. Discovery at a discount to their base value.

Many AT&T investors preferred the split-off since it was more adaptable, reduced the number of AT&T shares outstanding, and allowed them to get Warner Bros. Discovery at a better price.

Last week, AT&T CEO John Stankey assured that the company intended to spin off its stake in Warner Bros. Discovery, saying it is "simple, efficient and results in AT&T shareholders owning stock in both companies." The decision, already hinted at during AT&T's Q4 conference call on Jan. 26, weighed on the company's stock.

AT&T also announced a reduction in its annual dividend from $2.08 to $1.11 per share to reflect the sale of WarnerMedia. The announcement was not that shocking, since AT&T had previously told investors that it would cut its cash dividend payout ratio after the company split, but the reduction in the projected yield from 8.5% to 4.5% probably worried some income investors.

The dividend cut may also prompt some investors to take a closer look at AT&T's competitor, Verizon, which has a higher projected yield of 4.8%, controls most of the U.S. wireless market, and is not involved in confusing sales and splits.

At the end of 2021, the U.S. Federal Aviation Administration (FAA) said that 5G C-band networks, which are mostly used by AT&T and Verizon, could interfere with aircraft navigation systems.

In early January, AT&T and Verizon voluntarily shut down their 5G transmitters near airports and deferred their 5G network expansion assignments in nearby areas. On Jan. 28, the FAA, AT&T, and Verizon reached an agreement to include more 5G towers near airports, but only in particular locations that have been properly mapped.

These setbacks will likely be transient, but they could give T-Mobile -- which uses a mid-band (600 MHz to 2.5 GHz) spectrum instead of a high-band (3.7 GHz to 4.2 GHz) C-band spectrum -- an advantage over its two competitors.

T-Mobile's use of the mid-band spectrum, which penetrates buildings and hard objects more easily than the high-band spectrum, has already provided 5G networks with much wider coverage than AT&T and Verizon. If additional concerns about the security of C-band networks emerge in the future, AT&T and Verizon may find it difficult to catch up with T-Mobile in the 5G race.

If you already own AT&T, you should probably just hold your stock as the low valuation, high dividend yield, and forthcoming Warner Bros. Discovery should limit the downside potential.

But investors who don't already own AT&T probably shouldn't buy stock in this battered company just yet. In this volatile and relentless market, there are plenty of other top blue-chip stocks to buy right now.