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Why AT&T (T) Is Our Favorite Telecom Stock

Why AT&T (T) Is Our Favorite Telecom Stock

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Friday, 26 July 2019 02:29 PM Current | Bio | Archive

Now Telecommunications as an industry has been around for well over a century. With the invention of the telephone, the way the world communicates changed forever. While the industry is certainly much different than it was in the late 1800s, the sector remains a popular choice for income investors as the stocks in the group generally pay meaningful dividends.

One such stock in the group is AT&T (T), which made the cut as our favorite telecommunications stock. The company has been transforming itself for the past couple of years, diversifying away from traditional telecommunications revenue and into growth areas, including its 2018 purchase of Time Warner. Due to this improved growth outlook, we see AT&T as very cheaply priced, and it sports an enormous dividend yield to boot.

AT&T has underperformed the market slightly in 2019 on a pure price basis, but when dividends are included, AT&T has produced total returns almost identical to the S&P 500. But despite the strong move higher thus far this year, we think AT&T has much further to go.

Positioning For The Long-Term

AT&T is the largest telecommunications company in the world, and offers various services to its customers. Unlike rival Verizon (VZ), AT&T’s revenue is highly-diversified as it competes in traditional telecommunications like wireless service, but it also has DirecTV and the legacy Time Warner entertainment empire. In total, AT&T has more than 100 million customers that generate over $180 billion in revenue annually. The stock has a current market capitalization of $243 billion.

AT&T’s management team realized a few years ago that its legacy wireline and other traditional telecommunications businesses would struggle to grow over the long-term. That has certainly proven to be the right call, and to combat this, AT&T has gone out and made big purchases to try and boost long-term expansion. This includes purchase like Time Warner, DirecTV, AppNexus, and others. These buys allowed AT&T to enter markets where long-term fundamentals are much better than traditional communications channels, and diversifies revenue streams in the process.

The company is still very much in the transformation stage, however, and its results continue to reflect the significant change that is occurring. Q2 results were released on 7/24/19 and while the company boosted revenue by more than 15%, to $45 billion, during the quarter, earnings fell. Importantly, the enormous gain in revenue was driven by Time Warner, which closed near the end of Q2 in 2018, so this was the last quarter we’ll see such sizable revenue gains. Beginning in Q3, Time Warner will be part of the comparable revenue base.

The company’s legacy wireline services and video equipment businesses continue to struggle, but those were more than offset by Time Warner and gains in wireless service.

However, net income fell on an adjusted basis from 91 cents per share to 89 cents in Q2.

The company reiterated its expectation for a small amount of earnings-per-share growth over last year, and we are reiterating our estimate of $3.60 in earnings-per-share based upon that expectation. In addition, AT&T’s debt load is down to $162 billion as of the end of Q2, which is 10% lower than the $180 billion it carried a year ago.

We see the company’s move into stronger growth areas and its reduction of debt over time as long-term drivers of improved performance, and think the company can grow earnings at ~3% annually in the coming years.

Capital Returns Remain A Priority

Obviously, many investors own AT&T because of the dividend yield, which is still in excess of 6% despite the rally this year. In addition to the huge yield, AT&T’s dividend is quite safe, with a projected payout ratio of under 60% for this year. That’s outstanding for a stock with such a high yield, and it is the primary reason we like AT&T today.

Shares also trade for just over nine times this year’s earnings, while we see fair value at 12 times earnings. This significant undervaluation, combined with the stock’s 6%+ yield, makes AT&T quite attractive. While AT&T still has some growth challenges, we think the combination of the yield and valuation are more than enough to warrant a buy recommendation.

Disclosure statement: I am long AT&T (T) personally.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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AT&T (T) made the cut as our favorite telecommunications stock. The company has been transforming itself for the past couple of years, diversifying away from traditional telecommunications revenue and into growth areas.
telcom, warner, directv, appnexus
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2019-29-26
Friday, 26 July 2019 02:29 PM
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