Some people think AT&T (T) is a boring investment. If you are an entertainer being boring is bad. If you are a stock like AT&T, being boring can be good. Very good. In fact it's this very attribute, low volatility relative to the S&P with better than bond like yields, that have given it a reputation for being the perfect stock for pension funds and widows. I happen to think that T is a stock that every investor should have in his/her portfolio if for no other reason that it provides some stability to that portfolio by acting as a counterpoint to the more ... shall we say, "exciting" stocks?
Anyway, here's the boring stuff.
The company reported mixed 4Q results with revenue growth of $32.61 billion, up 2.8% YOY, ahead of consensus of 1.6% growth. However, as a result of a larger amount of subsidies for heavier than expected smartphone sales, EPS came in a little light at $.44.
On the bright side, the company had $.75/share in Free Cash Flow, even after accounting for an accelerated share repurchase program that involved reducing shares in the float by 6.3% in all of FY2012.
During the earnings call (BOORRRING), management emphasized its plan to assertively implement projects aimed at expanding its broadband and coverage capabilities in both its mobile and wireline networks. In addition they plan to roll out initiatives involving managed services to both retail and enterprise business customers. Finally they indicated a commitment toward continuing to return shareholder value with the company describing an accelerated pace of share repurchases for the remaining 229 million shares for which it is authorized to purchase. Which buy the way, represents an additional 4% of shares outstanding in addition to 6.3% that was already repurchased in 2012. Guidance for 2013 included 2%+ revenue growth, 8-10% adjusted EPS growth, and FCF exceeding $14 billion.
Slightly more interesting, we learned that there were 8.6 million iPhone activations during the quarter and 16% of those were customers new to AT&T. Although this larger than anticipated number of smart phone sales and subsequent subsidies in Q4 cut into margins this expense is expected to abate. Indeed, the rate of replacement for all smart devices expanded at AT&T from roughly 24 months during 2011 to almost 27 months for 2012. The good news is that there still may be some room for improvement in that area for FY2013 with smartphones having a longer useful lifecycle between replacements.
Improving margins in the wireless space and a trend towards longer useful lifecycles for smartphones are two reasons management feels confident that earnings will improve going forward. Revenue should continue to grow at a solid 2% rate as business ramp up purchasing put off by economic and political uncertainties in 2012.
Anyway, that was last year. What about next year? And what should I as an investor do?
Well, if you are looking for an exciting stock then stay away from AT&T.
Currently, as of the close of the market on Thursday, the stock is trading at $33.73/share. That's pretty much toward the bottom of a range which has fluctuated between $33/share on the low side to $38/share on the high end for most of the past year.
With a 2% rate of growth on revenue and higher margins due to lower subscriber acquisition costs, as well as a reduction of an additional 4% in share float due to repurchase programs, I would expect full year earnings to be in the neighborhood of $2.50/share. Apply a 15.5 x industry multiple and you get a $39 target price. With the $1.80 annual dividend included, this represents an implied expected twelve month total return of 20% from the current share price.
All of a sudden AT&T isn't so boring after all, eh?