When Investments Change
While enjoying some vaccinated vacation time at the amazing Cenotes in Chemuyil, Mexico, huge news broke on a massive media merger between AT&T’s (Ticker: T) TimeWarner assets and Discovery (Ticker: DISCA). As powerful as this new merger might be in the future to compete with Disney’s (Ticker: DIS) media division, the current ownership of AT&T doesn’t fulfill my original investment thesis anymore, so I sold my entire position.
My goal with my cash flow companies is to have strong and consistent dividends, along with an avenue for growth or capital appreciation over the long term. Prior to the merger, AT&T fulfilled this investment thesis. I would have received a 6%+ dividend (that the company repeatedly identified as safe) and the potential for strong growth with their WarnerMedia assets. 5G could offer AT&T some growth but they are now in intense competition with Verizon and T-Mobile, so the WarnerMedia assets were the only true aspect of AT&T that differentiated them from the other telecom giants.
Post merger, AT&T will divest all of the WarnerMedia assets (including HBO Max), becoming a pure play on broadband/telecom moving forward. I believe that the potential for AT&T to be rerated (valued at a higher multiple than the past) could have only occurred with those streaming/media assets because they could have acquired customers in the US and internationally, earning the subscription revenue and potentially opening the door for more advertising revenue. Yet, all of these growth driver’s evaporated with the merger.
At the same time, AT&T stated they will most likely cut the dividend (estimated to be cut in half) with the new deal. This action directly contradicts their prior announcements on the safety of the dividend. I don’t like management that states one thing publicly, yet their actions state otherwise. The WarnerMedia assets require content, which requires gobs of cash (using very technical terms here). AT&T reiterated the strength of their dividend with WarnerMedia involved. Now that WarnerMedia exits, AT&T cuts their dividend? I don’t like the optics, along with the 50% cut in dividends.
With my investment thesis broken, I sold all of my shares of AT&T for a 6.2% loss. I will reinvest those funds in another company that has growth potential and strong cash flow prospects. See below:
Replacing AT&T
As I researched AT&T’s replacement, I first identified the top cash flow companies on my watchlist. They include:
AbbVie (Ticker: ABBV)
Intel Corporation (Ticker: INTC)
PepsiCo (Ticker: PEP)
Realty Income Corp (Ticker: O)
STORE Capital Corp (Ticker: STOR)
Digital Realty Trust (Ticker: DLR)
Each have significant growth opportunities ahead, pay a strong dividend, consistently grow their dividend, and would be a solid long term hold for my portfolio. In the end, I chose Realty Income Corp (Ticker: O) as my new investment.
Realty Income Corp owns 6,500+ real estate properties with Walgreen’s being the largest client at 5.5% of the portfolio, so they are highly diversified. The company is a member of the Dividend Aristocrats, meaning they have increased their dividend for 25 or more consecutive years.
They recently purchased VEREIT’s portfolio of real estate assets and acquired another set of properties in Hawaii, allowing them to now operate in all 50 US states. Similar to Simon Property Group, Realty Income’s strong balance sheet allowed them to weather the challenges presented by Covid and purchase competitors. The company anticipates the redevelopments of some properties, but the company stated that they largely work with retail that is insulated from the ecommerce threat.
Realty Income is also seeing strong international growth in the UK, and will look to expand their platform in the future. International expansion for these REITs (click here for Real Estate Investment Trusts’ definition) provides tremendous opportunities for the company, if completed correctly.
They continue to be weighed down by their movie theater clients like AMC and Regal, but with the vaccine rollout and the success of Godzilla vs. Kong, management anticipates this headwind to abate in the upcoming year.
The stock currently trades around its 100-day moving average (the average price of the company for the last 100 days), which is nearly 9% off of its 52-week high and 20%+ off its all time high prior to Covid. They also pay a monthly dividend which I will immediately reinvest back into the company, compounding my future returns. Management sounded strong with a clear forward looking plan on their most recent conference call, reiterating their goal of keeping an impenetrable credit rating and sticking to their core competencies (i.e. they acquired some office properties with the VEREIT deal that they will look to sell/spin off).
For Realty Income specifically, I want to see them maintain their credit rating, continue to have a strong balance sheet, grow their portfolio of assets in the US and abroad, overcome the headwinds of ecommerce and movie theater attendance, and increase their dividend.
Looking forward to this cash flow-er in my portfolio.
Current Portfolio
Growth
AirBnB - ABNB
DraftKings - DKNG
DocuSign - DOCU
GoodRx - GDRX
MercadoLibre - MELI
Nvidia - NVDA
PagerDuty - PD
Pinterest - PINS
Redfin - RDFN
Roku - ROKU
Sea Limited - SE
Square - SQ
Teladoc Health - TDOC
Cash Flow
Merck - MRK
Realty Income Corp - O
Simon Property Group - SPG
Thank You!
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**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.