UBS upgrades AT&T, says simplified company is a buy after this week's dip

Published Fri, May 21 20215:59 AM EDTUpdated Fri, May 21 20218:34 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

The simpler version of AT & T without its media assets has attractive upside, and investors should take advantage of the recent dip, according to UBS. UBS' upgrade of AT & T's stock came four days after AT & T's deal with Discovery to spin off WarnerMedia and combine it with the entertainment company. Since the deal was announced Monday, AT & T's stock has dropped 8%. UBS analyst John Hodulik raised his rating to buy from neutral, saying in a note to clients on Friday that the leaner version of AT & T had a clearer pathway to improving its cash-flow growth. He also said shareholders would benefit in other ways even as the dividend is cut. "We see a favorable risk-reward at the current valuation given a more simplified set of connectivity-based assets, lower dividend payout (~40% vs. ~60% post-DTV deal), better visibility into [ earnings before interest, taxes, depreciation and amortization ], growth and lower leverage," the note said. The dividend decrease, which has caused some investors to bail on the stock, does not seem as drastic when considering the total results of the Discovery deal, UBS said. "While AT & T lowered its dividend by ~45%, the deal structure will provide an estimated ~$7-8 per share in one-time, tax-free payment (in the form of DiscoveryWarner shares), equating to 4-5 years of dividend payment in lump-sum," the note said. One thing that can help AT & T hit its post-spinoff goals is a rebound for the company's wireless segment. The economic reopening should help boost that part of the business, UBS said. "After the sale of its TV business and WarnerMedia spin, we estimate 70% of company profitability will come from wireless, followed by ~20% from business solutions and 10% from consumer wireline. We believe wireless has been impacted by the Covid-19 pandemic and should see improved profitability," the note said. The firm hiked its price target on the stock to $35 per share to $32, up 18% from where trading closed on Thursday. UBS wasn't the only investment firm to turn bullish on AT & T. London-based New Street Research also upgraded the stock to buy on Thursday evening. -CNBC's Michael Bloom contributed to this report.

John Stankey, President & Chief Operating Officer of AT&T and Chief Executive Officer of WarnerMedia, speaks onstage at HBO Max WarnerMedia Investor Day Presentation at Warner Bros. Studios on October 29, 2019 in Burbank, California.

Presley Ann | Getty Images Entertainment | Getty Images

The simpler version of AT&T without its media assets has attractive upside, and investors should take advantage of the recent dip, according to UBS.

UBS' upgrade of AT&T's stock came four days after AT&T's deal with Discovery to spin off WarnerMedia and combine it with the entertainment company. Since the deal was announced Monday, AT&T's stock has dropped 8%.

UBS analyst John Hodulik raised his rating to buy from neutral, saying in a note to clients on Friday that the leaner version of AT&T had a clearer pathway to improving its cash-flow growth. He also said shareholders would benefit in other ways even as the dividend is cut.