AT&T (T), the largest telecom operator in the US, provides mobile and landline services along with broadband internet and cable to nearly 190 million subscribers nationwide. The company operates in two main segments, namely: wireless and wireline.
The company’s Wireline segment provides high-speed broadband services to retail and business consumers, while the Wireless segment provides wireless voice and data services through AT&T’s growing 4G LTE network.
The telecom giant generates a bulk of its revenues (55%) from the Wireline segment. The wireless segment, on the other hand, brings in about 40% of its topline. The remaining 5% comes from Integration Services, which is essentially a consulting arm within the company.
The US carrier has been facing stiff competition from T-Mobile US Inc (TMUS) ever since the latter triggered a price war in the industry. The two companies’ mutual contempt for one another has produced better deals for many wireless consumers, but hurt the industry’s overall margins.
However, AT&T has proven that it can withstand competitive pressure, as is evident from the better-than-expected earnings results for its most recently-concluded fiscal quarter. Investors, too, have had little to complain about so far: AT&T has been the only major telecom stock to outperform the broader market in 2014.
Here are five reasons we are bullish on the stock.
AT&T has shown a propensity to conduct swift acquisitions, which has given the company many strategic advantages over the telecom industry.
The telecom giant has reportedly approached the largest satellite TV distributor in the US, DirecTV (DTV), over a possible acquisition deal. Word on the Street is that AT&T has offered about $40 billion for DirecTV, and that its product is likely going to complement AT&T’s broadband U-Verse service.
AT&T is also supposedly interested in purchasing Vodafone Plc (ADR)’s (VOD) wireless assets in Europe. While the company brushed those rumors off at first, they have resurfaced as something that could be back on the table later this year. AT&T hopes to drive overall revenue growth from international markets, as it is currently operating in a saturated and increasingly competitive market where its price war with Verizon Communication Inc. (VZ), T-Mobile and Sprint Corp (S) is losing it money.
The company has also completed its acquisition of Leap Wireless (LEAP) and the latter’s Cricket brand for $1.2 billion. Leap Wireless, the nation’s sixth-largest carrier at the time of its acquisition, and its prepaid subsidiary brand Cricket had about 4.5 million wireless subscribers at the end of 2013. The purchase of Leap, which brought with it spectrums in the PCS and AWS bands in 35 additional areas for AT&T, brought those customers to AT&T’s existing subscriber base.
AT&T technically paid a price of $4 billion for the additional spectra it acquired under the deal, which it says will complement the spectrum licenses it already owned at the time of acquisition. Nonetheless, its larger spectrum portfolio has put the company in a favorable position in the competitive telecom industry, where most players are vying for licenses to operate on more spectra in order to satisfy the rapidly growing demand for data downloads.
Despite its heavy spending on acquiring more companies, AT&T currently has the lowest debt-to-equity and total debt-to-enterprise value ratios among the major telecoms in the US (0.83x and 0.31x, respectively). In contrast, Verizon has a debt-to-equity ratio of 7.7x. Based on these numbers, we expect AT&T to easily secure any financing it requires to complete an acquisition in the foreseeable future.
Smartphone Penetration and Data ARPU
Demand for data usage per consumer in the US jumped from an average of 690 MB per month in 2012 to 1.2 GB in 2013, fueled largely by an increase in smartphone penetration, faster networks, and ever-evolving cellphone technology.
According to a recent study conducted by Cisco Systems Inc (CSCO), mobile data usage in North America is a little under 400,000 terabytes per month, but expected to increase by nearly 61% year-over-year (YoY) in the ongoing fiscal year. The same study says data consumption will swell to about three million terabytes per month by 2018.
Telecom, which happens to be the only pure play on growth in data services, stands to benefit the most as demand for mobile data usage increases. Industry leaders like AT&T and Verizon are projected to register immense gains as the two have the most robust networks compared to other players. Moreover, the two companies’ infrastructures are also more capable of handling the rapidly-growing demand for data.
The US smartphone penetration rate has risen from 42% in 2009 to 62% in 2014. It is expected to increase further as expanding coverage boosts growth in subscriptions for mobile data plans.
AT&T netted 3.4 million wireless subscriber additions in 2013, of which smartphone sales accounted for 93%. The company’s financials for the fourth quarter (4Q) of fiscal ’13 (FY13) indicate that smart device users now make up more than 75% of the company’s total subscriber base.
AT&T’s wireless average revenue per user (ARPU) is a strong indicator of the company’s future earnings potential. The total wireless ARPU for the company increased from $46.89 at the beginning of 2013 to $47.58 by the end of the year (4QFY13). The increase was led by growth in revenues generated from data plans, which registered 9.2% growth over the previous year.
Data usage and its contribution to ARPU growth is expected to increase further with growth in smartphone sales. Furthermore, the ongoing expansion in AT&T’s 4G network is also expected to encourage data usage, which will subsequently boost the company’s ARPU.
AT&T’s U-Verse is a wireline service through which the company provides broadband cable and internet services. It is one of the fastest-growing segments for the company.
U-Verse revenues grew by over 30% YoY in 2013 to $12 billion. Over the three preceding years, the segment’s revenues had compounded at an annual rate of 40%, with most of the growth coming from subscriber additions. We expect the segment to continue to grow at a rapid rate as the company expands its offerings.
AT&T is currently in the process of rolling out the service in new markets with GigaPower, an ultrafast fiber network (that is being gradually deployed). The company expects to register 30% growth in service subscriptions this year, which is feasible given that the company’s net adds for the service have averaged over 800,000 over the last five years.
AT&T, which has consistently raised its dividends for the last 25 years, is part of the Dividend Aristocrats Club. Moreover, the stock’s dividend yield, currently 5.12%, is one of the highest in the industry. AT&T’s dividend is also expected to be increased by 2.25% in the next twelve months.
The company has also returned value to investors through share buybacks. It returned about $13 billion to shareholders through repurchases in 2013, and so far this year, has already spent $1.2 billion buying back stock.
For a complete dividend analysis of the company, you can visit the following link:
AT&T stock is currently trading at a forward price-to-earnings (P/E) multiple of 13.2x – that is a discount to the broader industry, which is trading at a P/E multiple of 29.7x. The S&P 500 Index, which tracks the broader market, is also trading at a higher P/E multiple of 16x.
While AT&T has traditionally traded at a discount to the S&P 500 Index (five-year average: 12.3%), the company’s current valuation is a discount of almost 18% to the broader market – which indicates that it is considerably undervalued. If AT&T was trading at its 5-year average discount to the S&P 500 Index, it would be priced close to $38 per share – about $2.40 more than its current price of $35.60 apiece.
AT&T has a diverse portfolio of products and services, which has made it one of the leading network providers in the country. The US-based carrier is well capitalized, fundamentally sound, and one of the highest yielding blue chips. This makes it a good pick not just for dividend investors, but also for those looking for a safe bet on the telecom industry.