Is AT&T Stock A Good Choice If The Market Enters A Recession? (NYSE:T)

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I upgrade my rating for AT&T Inc.’s (NYSE:T) shares from a Hold to a Buy, as I view T as a good investment choice if the market enters a recession.

I touched on the increase in HBO subscribers in my prior February 8, 2022 update for the stock. In my latest article, I find that AT&T is a good investment candidate in a recessionary environment, following an analysis of the company’s ability to raise prices and optimize costs, and its historical financial performance.

Is AT&T Stock Recession Proof?

AT&T should be reasonably resilient during a recession to a large extent, although it will be a stretch to refer to any company or industry as recession proof.

Investors have traditionally viewed the telecommunications sector to be defensive, as such companies tend to be relatively less economically sensitive and have reasonable pricing power. This line of thought is supported by T’s management comments and the share price performance of AT&T and its peers.

At the Bank of America (BAC) Technology, Media & Telecom Conference or TMT Conference on June 23, 2022, AT&T’s Chief Operating Officer or COO Jeff McElfresh commented that “as history has shown us, telecommunications services are quite resilient to inflationary pressures or recession” as “they’re essential.” The market obviously agrees with T’s COO, as AT&T, and its peers Verizon Communications Inc. (VZ) and T-Mobile US, Inc. (TMUS) have outperformed the broader market this year thus far as per the chart below.

The 2022 Year-to-date Share Price Performance For The Three Wireless Or Mobile Telecommunications Companies

The 2022 Year-to-date Share Price Performance For The Three Wireless Or Mobile Telecommunications Companies

Seeking Alpha

While the S&P 500 has lost approximately a fifth of its value in the first seven months or so of 2022, AT&T and T-Mobile have delivered positive share price returns for their respective shareholders over this period, while Verizon’s year-to-date stock price decline is a relatively mild -3%.

Demand for wireless telecommunications services has been stable historically, and I will cite AT&T’s financial performance during the 2008-2009 Global Financial Crisis as a reference in the next section. But even assuming that the next recession is worse than expected and unemployment numbers shoot through the roof, AT&T does have levers to offset any decline in revenue resulting from economic weakness and the spike in certain costs due to inflation.

One key lever is price increases. A June 14, 2022 Seeking Alpha News article cited comments by the CFO of AT&T at a June 2022 Credit Suisse (CS) conference which highlighted that T is considering a second round of price hikes after announcing price increases earlier in May 2022. This sends a strong signal that AT&T has the power to pass on the increase in expenses to its customers by raising prices.

Another lever is cost optimization. At the company’s Analyst Day on March 11, 2022, AT&T revealed that it has already delivered on about $3 billion worth of annual expense savings with its multi-year cost optimization program by the end of last year. T’s target is to increase its cost savings on an annual basis to $6 billion by end-2023. The key drivers will include a change in AT&T’s network mix with a higher proportion of fiber and 5G fixed wireless (reduced percentage of copper), a decrease in the number of data centers and a shrinkage of its physical property footprint.

Furthermore, AT&T also has certain non-fixed costs which it could tackle to mitigate the impact of slower top line expansion. T’s COO mentioned at the BAC TMT Conference in June that “our variable cost model in distribution gives me a few different tool sets” assuming “that (revenue) growth is tempered a bit.”

On the flip side, a severe recession could lead to weaker-than-expected subscriber growth, and the wireless companies might become more aggressive in competing with peers. In addition, the telecommunications business is a labor-intensive one, and AT&T had more than 200,000 staff on its payroll at the end of 2021, which makes it susceptible to inflationary pressures relating to salaries.

Nevertheless, AT&T should still perform pretty well in a recession all things considered, and I will highlight certain metrics to prove this point in the subsequent section.

AT&T Stock Key Metrics

AT&T’s key metrics as per its historical financial results offer an indication of how well the company’s top line and bottom line will hold up if the US enters a recession.

During the 2008-2009 Global Financial Crisis, AT&T’s revenue increased by +4.3% in fiscal 2008, while its top line declined marginally by -0.8% in fiscal 2009. Similarly, T’s EPS grew by +11.3% in FY 2008, and its bottom line contracted slightly by -1.9% in FY 2009.

AT&T’s Key Financial Metrics For The FY 2007-2009 Period

AT&T's Key Financial Metrics For The FY 2007-2009 Period

AT&T’s FY 2009 Annual Report

Based on financial data sourced from S&P Capital IQ, AT&T increased its dividend per share payout by +9.9% and +2.5% to $1.61 and $1.65 for 2008 and 2009, respectively.

In a nutshell, T’s performance was decent during the prior major recession, the 2008-2009 Global Financial Crisis. AT&T remained profitable during this period, and it even increased its dividend payout in absolute terms in these two years. Although AT&T’s revenue and EPS did decline in fiscal 2019, the magnitude of the contraction for both its top line and bottom line wasn’t significant.

Where Is AT&T Stock Heading?

I am of the view that AT&T stock price should be heading north, as the stock’s current valuations don’t appear to have factored in the defensiveness of T in the event of a recession.

AT&T is currently valued by the market at a consensus forward fiscal 2023 free cash flow yield of 13.8%, and this is much higher than T’s 10-year mean consensus forward next twelve months’ free cash flow yield of 9.4% as per S&P Capital IQ’s valuation data. On an absolute basis, a free cash flow yield of 10% and above is typically an indicator of attractive valuations as a rule of thumb.

Is T Stock A Buy, Sell, or Hold?

T stock is a Buy. It is prudent to be defensive now taking into account the risk of a recession in the near term. While AT&T is expected to be resilient in the scenario that a recession materializes, this doesn’t seem to have been priced into its valuations yet. Therefore, I am bullish on AT&T and think that it deserves a Buy rating.

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