AT&T Inc. (T) is by market cap the largest telecommunications company in the United States. AT&T operates in four segments: wireless, wireline, advertising Solutions and Other. Its wireless subsidiaries provide both wireless voice and data communications services across the United States, and as of Sept. 30 had over 105 million subscribers. AT&T along with its archrival Verizon (VZ) have been successful in diversifying themselves away from the declining landline segment. The stock is currently trading for $33.32 and is down about 11% from its YTD highs. AT&T seems to have found some support at around $33.00, and has been range bound since mid October.
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AT&T currently offers a high and compelling dividend of $0.45 per quarter, for a 5.4% dividend yield. This dividend has been increased yearly for nearly 30 years. For most of the past 5 years, the yield for AT&T has been closer to 6%.
In sharp contrast with other telecom companies, AT&T has experienced consistent revenue growth for the past 5 years. TTM revenues have risen 7.1%, to $137.4 billion, since 2008, while on a per share basis, revenues are up 12.4%, to $21.62 per share. The increase in revenues for AT&T since 2008 can be attributed to it having exclusivity on the iPhone for several years. The iPhone now makes up nearly 77% of smartphone sales for AT&T. 4.7 million iPhones were activated in Q3, while Q4 it is expected that iPhone sales will nearly double to above 9 million.
An area of concern for AT&T has been a decline in net income. TTM net income for AT&T declined 78% in 2012, from over $20 billion in 2011 to a current $4.4 billion. On a per share basis, TTM EPS has declined from around $3.40, to a current $0.77, a similar 78% decline. The decline in profitability for AT&T can also be seen in TTM EBITDA margins, which have contracted to 24%, from over 30% a year ago. However, do not be discouraged; this decline in earnings is the result of a massive $6.7 billion the company took on the failure of its planned T-Mobile deal.
A true measure of AT&T financial strength is by looking at its operating cash flow. TTM cash from operations stood at $36.4 billion. TTM capex has been around $20 billion. TTM dividend payments stood at $10.3 billion, while stock buybacks were around $8 billion. The TTM net shareholder payout has been over $18.1 billion, for a 8% net shareholder yield.
Looking at AT&T's balance sheet, we can see that the company does have a large debt load, at over $64 billion. However, the debt to equity ratio for AT&T is only 0.63. TTM free cash flow for AT&T is around $17.3 billion. TTM EBIT to interest expense is well above 7X, with the only hiccup being the massive writedown for the T-Mobile deal. AT&T is hardly having trouble with its credit rating, with S&P rating its recent 2045 senior notes at A-.
For investors looking for a income from the telecom sector, AT&T should be considered the top choice. Not only does AT&T offer a well above average yield of 5.4%, but it also offers potential growth from ever increasing smartphone adoption. On a risk/reward scale, AT&T offers relatively low risk and medium returns. This cannot be said of some of the rural telecom companies such as Frontier (FTR), Windstream (WIN), and CenturyLink (CTL). While rural telecoms may offer slightly higher yields, they also are much more risky. AT&T offers not only a high dividend, but dividend growth and stock buybacks, with its total shareholder return (dividend + stock buybacks) being over 8%.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in T over the next 72 hours.