AT&T (T 0.66%) and Cisco (CSCO 0.53%) are generally considered conservative income investments rather than high growth securities. AT&T is still paying a forward dividend yield of 5.4% following its spin-off from Discovery of Warner Bros. (WBD 2.19%)and Cisco pays a forward yield of 3.5%.
Should investors buy either of these blue chip tech stocks as defensive plays against inflation, rising interest rates and other macro headwinds? Let’s reevaluate their growth rates, challenges and valuations to find out.
Will the “new” AT&T fare any better than the original?
AT&T has generated dismal returns since 2015 for one simple reason: It neglected its core wireless business while aggressively expanding its pay-TV and media businesses with debt-fueled acquisitions. This expansion added DirecTV, Time Warner and other smaller companies to AT&T’s ecosystem. But despite all of this, AT&T continued to lose pay-TV subscribers to netflix and other video streaming platforms. In response, the telecommunications giant attempted to expand its own streaming video services, but these efforts were costly and confusing for consumers, and ended up cannibalizing legacy pay-TV offerings from At&T. As AT&T tried to fix its messy media business, it fell further behind its competitors Verizon and T-Mobile in the 5G market.
But last year AT&T spun off DirecTV and began divesting its small media and real estate assets. Last month, the company did the same with its Time Warner assets and merged them with Discovery to create Warner Bros. Discovery. AT&T says the divestments will streamline its business, reduce its debt and allow it to focus on long-term growth of its core telecommunications business.
AT&T expects its revenue to grow by double digits in 2022 and 2023 and its adjusted EPS (earnings per share) to grow by 2% in 2022 and up to 7% the following year. At the start of 2021, AT&T’s net debt to EBITDA (earnings before interest, tax, depreciation and amortization) ratio was 3.1. Management attributed this to $23 billion paid out in C-band spectrum payments, projected this ratio to be a “maximum level of leverage”, and planned to reduce the multiple to 2.5 by the end of 2023. It also aims to generate $20 billion in free cash flow in 2023 and spend about 40% of that total on its dividends.
AT&T’s long-term forecast isn’t exciting, but it does show the company is on its way to becoming a more stable telecommunications company again. If that strategy pays off, its stock could be an excellent call right now, trading at eight times forward earnings.
Cisco faces short-term headwinds
Cisco is the world’s largest producer of network switches and routers, but both of these markets have been heavily commoditized. It has expanded beyond those legacy products with new wireless devices, cybersecurity services, and apps, but the $49.8 billion in revenue in fiscal year 2021 (ended July 2021) only accounted for only a modest 1% year-over-year increase.
Last September, however, Cisco made some big promises. It said its revenue and adjusted EPS would both grow at a CAGR of 5% to 7% between fiscal years 2021 and 2025. Management said it could achieve this acceleration by expanding its higher-growth subscription business. high and higher-margin and expanding its total addressable. market (TAM) with new products and services.
Unfortunately, Cisco’s growth fell short of these goals throughout fiscal 2022 as it grappled with supply chain challenges, new COVID-19 lockdowns in China, and the Russian war. -Ukrainian. Cisco insists market demand for its products is still “strong,” but it also doesn’t know when those headwinds will finally subside.
As a result, Cisco now expects revenue to grow only 2% to 3% for the full year and adjusted EPS to grow 2.5% to 5%. This slowdown is not disastrous, but it could force it to reconsider its ambitious growth objectives for the 2025 financial year.
On the bright side, Cisco has only spent 46% of its free cash flow on dividend payments over the past 12 months, leaving plenty of room for future upside. Additionally, its low forward price-to-earnings ratio of eleven should further limit its downside potential in this tough market.
Best Buy: AT&T
Both of these blue-chip stocks are pretty safe plays, but I think AT&T will remain a better buy than Cisco for three reasons: its stock is cheaper, its yield is higher, and it faces fewer supply chains. and headwinds. Cisco’s outlook may brighten after this difficult period, but its title could remain in the penalty box until it readjusts its expectations for 2025.