Summary
- Recently Elliott Management sent a letter to AT&T’s Board of Directors.
- In this letter the company details AT&T’s underperformance as a key issue.
- This article illustrates why that view may not paint a complete picture.
- Looking for a portfolio of ideas like this one? Members of Inkrot's Income Portfolio get exclusive access to our model portfolio. Get started today »
On Sept, 9, 2019, Elliott Associates, L.P. and Elliott International, L.P. sent a letter to the AT&T (T) Board of Directors, indicating that Elliott owned $3.2 billion of the company, thought that shares were deeply undervalued and laid out areas that they envision could help the firm. Items for consideration included an improved strategic focus, operational improvements, a formal capital allocation plan and enhanced leadership.
The management company also identified areas where they thought AT&T had performed poorly in the past. This included numerous strategic setbacks, operational underperformance, product issues and lack of retention and leadership – all of which may be viable concerns to a small or large degree. Improvement can be achieved in many areas and certainly this should be welcomed by the company and shareholders alike.
With that being said, one point in particular caught my attention with Elliott’s letter. The firm starts off by suggesting that AT&T’s “prolonged and substantial” underperformance has been a “profound and persistent” negative resulting in a “disappointing investment for its shareholders.” Thinking about AT&T as a long-term investment, this did not fit my personal narrative. Indeed, I believe Elliot is making the mistake of thinking about investing as a singular moment rather than a consistent experience over time. It’s what I generally refer to as a “point-to-point” comparison rather than looking at the whole picture.
Let me give you an example to demonstrate what I mean. At the end of 2007 shares of AT&T were trading hands at $41.56. Today the number is closer to $38, meaning that shares are still trading below where they were nearly 12 years ago.
Now some might see this figure and think “gee, what an awful investment AT&T has been.” Yet this idea misses three very important concepts: dividends, reinvestment and adding new capital.
Stock charts will show you the $41 to $38 move in great detail – a play-by-play of every increment – yet they do not usually highlight the cash payments received along the way. In the case of AT&T these payouts were substantial – totaling $21.33 in nominal dollars per share. This brings your total investment value up to ~$59. That works out to a total gain of ~43% instead of a ~9% capital appreciation loss. Now this still is not spectacular, but it illustrates the point: only looking at two price points leaves out some important items in the middle.
Let’s expand on this idea and think about the dividend investor who chooses to reinvest their dividends.
