Why Did AT&T Stock Get An Upgrade?

AT&T Inc T has been a hot stock for discussion given the company's decision to spin off its streaming business to focus on its communication assets. The decision to get "back-to-basics" led to an analyst upgrade Friday. 

The AT&T Analyst: UBS analyst John C. Hodulik upgrades shares of AT&T from Neutral to Buy and raises the price target from $32 to $35.

Related Link: Why The Discovery AT&T Deal Poses A Credible Threat In Streaming Wars

The Analyst Takeaways: Completing a spin-off of its streaming business with Discovery Communications DISCA could help simplify the structure for AT&T.

“We see a favorable risk-reward at the current valuation given a more simplified set of connectivity-based assets, lower dividend payout, better visibility into EBITDA growth and lower leverage,” Hodulik said.

The deal with Discovery will lower AT&T’s dividend payout by around 45%. The deal structure could bring in $7 to $8 per share in a one-time tax-free payment via shares of DiscoveryWarner, which represents four to five years of dividend payment in lump-sum, Hodulik said.

The analyst believes a goal of free cash flow of $20 billion is achievable by 2023. Interest costs will be $2 billion lower according to the analyst.

“We expect growth in wireless and fiber with additional cutting to more than offset legacy declines.”

The analyst assigned a price target of $35 based on a value of $28 per share for AT&T Communications and $7 a share for the 71% stake in the WarnerMedia and Discovery Communications streaming company.

“While we believe a discount is warranted given AT&T’s higher wireline mix, we believe the gap should narrow," Hodiulik said.

T Price Action: Shares of AT&T are up 1.13% to $29.98 on Friday afternoon at publication.

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