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AT&T (T) Updates Shareholders on Long-Term Growth Targets

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The top management of AT&T Inc. (T - Free Report) recently debriefed investors about the underlying growth opportunities and its progress on various operational metrics. Pascal Desroches, senior executive vice president and chief financial officer of the company, also shed some light on its continued business transformation initiatives to create long-term value for shareholders.

Desroches reiterated that AT&T is focusing on core wireless businesses to maintain its leading market position, as the industry continues to benefit from a healthy uptick in demand amid the lingering coronavirus scare. The company is aiming to profitably increase its postpaid subscriber base leveraging its network quality and market penetration capabilities. Riding on such go-to-market strategy, AT&T’s total wireless subscribers increased by 5.5 million to reach 191.6 million in service by the end of second-quarter 2021. The company witnessed solid subscriber momentum with more than 1,156,000 post-paid net additions and 174,000 prepaid phone net additions as work-from-home trend gained traction. Postpaid churn improved to 0.87% from 1.05% in the year-ago quarter with significant improvement in phone churn. AT&T expects this momentum to continue in the second half of the year as well with diligent execution of operational plans.

While optimizing operations, the company is also aiming to increase efficiencies to lower operating costs, while focusing on 5G and fiber-based broadband connectivity. The company expects to connect 2.5 million locations with fiber by the end of the year as it continues to expand its fiber builds in metro areas. The company expects to adequately address the supply chain headwinds that forced it to reduce its year-end fiber location target to 2.5 million from 3 million, and remains well on course to achieve a target of 30 million customer locations by the end of 2025.

AT&T further expects to benefit from solid demand trends in HBO Max across domestic and international markets. The company is likely to launch HBO Max in six European countries next month and follow it up with additional launches in 14 other countries in Europe in 2022. Despite a short-term headwind of the unavailability of HBO Max on Amazon Prime Video Channels of, Inc. (AMZN - Free Report) , the company expects to achieve 70-73 million global HBO Max and HBO subscribers by the end of 2021.   

Additionally, AT&T expects the merger of its WarnerMedia assets with Discovery, Inc. (DISCA - Free Report) to be completed by mid-2022. The transaction aims to spin off the carrier’s media assets and merge them with the complementary assets of Discovery. Post completion of the deal, AT&T will receive $43 billion in a combination of cash and debt securities and will own 71% of the new entity, while Discovery will own the remainder. The transaction is expected to enable the carrier to trim its huge debt burden and focus on core businesses. The separation of the media assets is likely to offer the company an opportunity to better align its communications business with a focused total return capital allocation strategy. Moreover, a focused entertainment company is likely to be better placed to capitalize on the booming direct-to-consumer (DTC) streaming services market and unlock value from media assets. This, in turn, could help it to reinvest in the new entity for more content and digital innovation in order to scale the global DTC business. The transaction is expected to generate cost synergies of $3 billion per year resulting from technology, marketing, and platform savings with consolidation of DTC capabilities and elimination of duplicate initiatives.

Post completion of the deal, AT&T expects revenues to witness a CAGR of low single digits from 2022 to 2024, with adjusted EBITDA and adjusted earnings per share recording a CAGR of mid-single digits. The company further expects annual dividends in the range of $8-$9 billion, reflecting a payout ratio 40% to 43% on a projected free cash flow of more than $20 billion in 2023.  

AT&T is increasingly focusing on its customer-centric business model to attract and retain customers for a lower churn rate. The company is witnessing healthy momentum in its postpaid wireless business with increased adoption of higher-tier unlimited plans. This, in turn, is expected to result in year-over-year growth in wireless customers with unlimited tariff plans.

The stock has lost 6.6% in the past year against the industry’s decline of 4.9%.

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Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. A better-ranked stock in the broader industry is Qualcomm Incorporated (QCOM - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Qualcomm has a long-term earnings growth expectation of 21%. It delivered an earnings surprise of 13.5%, on average, in the trailing four quarters.

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