Penn Wealth Publishing

2019.06.30 Penn Wealth Report Vol 7 Issue 03

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12 penn wealth Report volume 7 issue 03 30 Jun 2019 Penn Wealth Report Copyright 2019. All Rights Reserved. investment intelligence Telecommunication Services Owning AT&T is Becoming a Real Drag You don't have to love a company you own, but it helps if you have at least a little confidence in management. For years, we owned telecommunications giant AT&T (T $27-$31-$35) in the Global Leaders Club— the vehicle reserved for great companies with a solid "sleep at night" factor. As we began to lose conviction in the $224 billion firm's rightful position in that strategy, our latest pickup of T shares was for the Penn Strategic Income Fund—a vehicle designed to provide a nice stream of income through lower-beta acquisi- tions. With a 5-year beta of 0.59 and a dividend yield of over 6.5%, this addition was a relatively easy choice. Now, however, we are having serious concerns about this holding. To be sure, the P/E ratio is a paltry 10.60, and reve- nue, net income, and free cash flow (the life blood of a company) have all remained strong. Take a look at the chart, however, and see how the company's shares have performed in an era of relatively strong numbers. So, what gives? We believe the answer can be found in the C-suite. To illustrate our point, let's take a look at the company's current focus. AT&T's business model. What do you think of when you hear the name AT&T? Odds are, you think cellphones and telecommuni- cations. And, in fact, a full 40% of T's $170 billion in annual revenue comes from their wireless commu- nications segment. As the second-largest US wireless carrier—behind Verizon (VZ)—the company connects over 100 million devices. With T-Mobile (TMUS) and Sprint (S) a distant third and fourth, respectively, this business line has remained strong for AT&T. If the government ultimately approves the T-Mobile/Sprint merger, the landscape will become more challenging, but the FCC and US Department of Justice don't seem to be in any hurry for that to happen. Next comes the consumer and entertainment segment, which includes the Internet and DirecTV business lines (with the latter ultimately replacing AT&T's U-Verse service). is group, which accounts for the next 25% of revenues, is where it gets very interesting. We could say that subscribers are leaving the company's services en masse, but let's quantify that: in the first quarter of 2019 alone, T reported a loss of 544,000 premium TV subscribers, and 83,000 DirecTV Now (their cord-cutter's package) subscribers. at is almost unfathomable. Having had personal experience with both the U-Verse and DirecTV models, we understand exactly why this has happened: poor service, high fees, and a customer service department consisting of dispa- rate parts that don't seem to be communicating with one another. Ironic, considering the company is in the communications business. If we had to guess, we would say that the DirecTV integration has been any- thing but seamless. e costly Time Warner pickup (now called WarnerMedia), which included HBO, accounts for about 20% of revenues, and cost the company a whopping $85 billion. T CEO Randall Stephenson felt he had to make the deal to compete with Comcast (CMCSA), which operates Xfinity and had purchased the remainder of NBC Universal from General Electric (GE). And therein lies the biggest problem: that enor- mous merger was a strategic mistake. e best outcome for AT&T shareholders would have been for the government to quash the merger, to the consternation of Stephenson. He would have responded angrily, just like then-Sprint CEO Bill Esrey did when the feds killed that company's merger with WorldCom. Of course, we now know that move saved Sprint from extinction. AT&T has a terrible history of morphing differ- ent corporate cultures into one. And Stephenson, in our opinion, exemplifies that lack of finesse. Yes, we still own the stock—and its 6.5% dividend—in the Strategic Income Portfolio, but it is on a very short leash. Now, the best T shareholders can hope for is that Stephenson rides off into the sunset. at is doubtful. e contents of this report reflect the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guar- antees can be made and the firm is not liable for any losses incurred by subscrib- ers. is is not a solicitation to buy. Always consult your investment professional before investing any money.

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