AT&T has announced new financial targets for the coming three years, following pressure from shareholders such as Elliott Management to rethink its strategy. The aim is to grow revenues 1-2 percent per year, improve margins through cost savings and divest more assets in order to boost free cash flow and shareholder returns while reducing debt. While two new directors will be appointed in the next two years, AT&T maintained its commitment to Randall Stephenson as CEO, who will stay on through 2020 at least.
Subscriber losses, weak revenue growth and a high debt level have put AT&T under pressure to show its takeovers of DirecTV and Time Warner were the right strategy. The new outlook is based on expected additional cost savings from the Time Warner integration, EBITDA improvement at AT&T Mexico and organic growth opportunities in mobile and from the upcoming SVoD service HBO Max. Elliott said it backs the proposals and expects improvement in the AT&T share price.
HBO Max to dilute EPS
While HBO Max is expected to contribute to revenue growth, the investment will still weigh on margins in the coming years. AT&T estimates starting up the new service will reduce EPS by an estimated 15-20 cents per share in 2020 and another 10 cents per share in 2021 and 2022. Despite the dilutive effect, AT&T expects group adjusted EPS to grow from an estimated USD 3.60-3.70 in 2020 to USD 4.50-4.80 in 2022.
The growth is supported in part by a targeted 200 basis point improvement in the adjusted EBITDA margin by 2022, to 35 percent, slightly less than the 36 percent proposed by Elliott. AT&T forecast a stable margin in 2020 and said the figure should start growing from 2021. Overall, AT&T expects adjusted EBITDA to increase by around USD 6 billion by 2022 from 2019 levels.
More cash flow for share repurchases
EPS growth will be supported further by the planned share buyback starting this quarter. AT&T said it plans to use a growing share of free cash flow to buy back around 70 percent of the shares issued for the Time Warner takeover. The dividend pay-out will drop to a low 50s percent of free cash flow next year and less than 50 percent by 2022. Around 50-70 percent of free cash flow after dividends will go to share repurchases.
The absolute dividend will still show "modest" annual increases, AT&T said. This is supported by growth in free cash flow, from an estimated USD 28 billion this year and in 2020 to a targeted USD 30-32 billion in 2022. Additional cash flow will come from divestments of non-core assets, which are expected to bring in USD 5-10 billion in 2020. The company did not say which assets would be considered for sale.
AT&T already raised around USD 14 billion from asset sales this year, and this is largely going to debt reduction. The aim is to pay off all of the Time Warner acquisition debt and take the net debt ratio to 2.0-2.25x adjusted EBITDA by 2022, compared to a planned 2.5x at the end this year.
No more acquisitions
The company said it will continue to review actively its portfolio and pledged no more major acquisitions. Its Corporate Development and Finance Committee has an ongoing review of operations and costs, one of the demands made by Elliott. AT&T said its new objectives were part of its plans already at the time of the Time Warner acquisition, but its "thinking has also benefited" from discussions with Elliott and other shareholders.
CEO Randall Stephenson said the engagement with Elliott was "constructive and helpful, and I look forward to continuing those conversations. These are smart people who very much appreciate the opportunity we have to create tremendous shareholder value."
While some shareholders have called for Stephenson to be replaced, AT&T said it's sticking with the CEO through at least 2020. In a concession to the shareholder demands, it announced two new directors would be added to the board over the next 18 months, as others retire. The company expects to add a new director at its next board meeting, followed by another director in 2020.
Elliott gives backing
AT&T's new targets do not go as far as Elliott Management's suggestions, which called for a deeper cull of assets and costs. However, the investor issued a statement saying it supports AT&T's efforts, "which will create substantial and enduring shareholder value at one of America’s greatest companies". It noted that AT&T has agreed to separate the roles of CEO and chairman at the next CEO transition as well as evaluate "all potential CEO candidates".
Eliott said further in a statement that it welcomed the continued dialogue with AT&T and the new plans made it "confident this will yield significant share price upside".
