Barron\'s - 16.09.2019

16 BARRON’S September 16, 2019

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Reconnecting With AT&T

AT&T’S BOARD GOT AN UNWELCOME SUR-

prise this past Monday, when a well-known

activist investor decided to question the

company’s long-honed—and expensive—

strategy. For investors, though, Elliott

Management’s new focus on AT&T is

likely tohave positive long-term benefits.

Elliott, the hedge fund run by Paul

Singer, revealed a $3.2 billion stake in

AT&T and published a letter to its board

laying out its grievances about several

costly acquisitions and the company’s man-

agement, while proposing strategies to cut

costs and improve capital returns.

Many of Elliott’s recommendations are

already in the works at AT&T (ticker: T),

but investors should benefit from greater

transparency and the formalization of

plans. Elliott may succeed in getting spe-

cific targets on profit margin and capital

return.

Some of Elliott’s other proposals—for a

review of assets to be sold that could in-

clude divesting satellite TV unit DirecTV

and shaking up top management—seem

less likely to be voluntarily adopted.

In response to Elliott’s letter, AT&T

says it remains committed to its diverse

portfolio: “[Our] strategy is driven by the

unique portfolio of valuable businesses

we’ve assembled across communications

networks and media and entertainment.”

Andwithastakethatisbarely1%of

AT&T’s $280 billion market value, Elliott

will have limited ability to force change.

Nonetheless, Elliott’s involvement

boosted AT&T’s shares 4.6% this past

week alone, to about $38. The hedge fund

contends that its proposals could lift the

stock to $60 a share by the end of 2021.

Barron’swas bullish on AT&T in a

March cover story, citing its cash-generat-

ing power, promising 5G opportunity, and

inexpensive valuation relative to the mar-

ket and its peers. Since then, its shares

have returned 25%, including dividends,

versus a 7% return for the broader market

and 3.5% for rivalVerizon Communica-

tions(VZ). That’s after several years of

underperforming the market and rivals—a

point that Elliott drove home repeatedly in

its letter to the board.

AT&T management has indicated that

stepping up share buybacks was likely,

even as it takes steps toward paying off its

nearly $180 billion in debt.

Elliott would like to see AT&T go fur-

ther and commit to growing its dividend

by 2% a year and spending half of remain-

ing free cash flow on stock buybacks and

half on debt reduction. That plan could see

AT&T buying back close to 3% of the mar-

ket value of its stock next year, on top of

its nearly 6% dividend yield.

Verizon, meanwhile, has been making

progress on a $10 billion cost-reduction

plan by 2021. Elliott sees a similar oppor-

tunity for AT&T to trim expenses and ex-

pand profit margins by reducing staff and

reining in expenses. AT&T has, in fact,

widened its profit margins in recent years,

but lags behind Verizon’s efforts.

Cost discipline and clarity on future

shareholder returns could certainly keep

AT&T shares rising. As for the more fun-

damental changes Elliott is seeking—

investors shouldn’t hold their breath.

—NICHOLAS JASINSKI

Activist Paul Singer has come calling.

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