Why I Bought AT&T Despite Less than Stellar Earnings

As I wrote earlier, I was disappointed in needing to sell my Morningstar (MORN) shares Friday morning as that stock fell under the pressure of a disappointing earnings report as well as the generalized weakness in the financial sector.

One stock that I have been watching as a possible 'safe haven' has been AT&T (T) which as I wrote this was trading at $23.60, up $.41 or 1.77% on the day. AT&T at this price trades with a P/E of only 10.92 and a yield of 7.07%. On Friday I purchased 71 shares of T at a price of $23.64. This peculiar share amount was calculated as I have described previously by calculating the average size of my other four holdings and buying 1/2 of that average amount to replace my 5th position, Morningstar, which was also sold Friday morning.

Scott Moritz over at Street.com commented about how Goldman Sachs analyst Jason Armstrong has upgraded both Verizon (VZ) and AT&T and both stocks have responded positively.

The article explains:

"With AT&T and Verizon down about 18% so far this year, Armstrong says the "pendulum has swung too far" and that it's time to consider the long-range perspective. In a research note Friday, Armstrong recommends buying shares of the two telco titans now, while pessimism about the economy is weighing so heavily on the market.

Why now? Armstrong has three points: The bar has been lowered in terms of Wall Street expectations, both telcos have "an achievable path to growth in 2010," and both offer a big, safe dividend -- about 7% annual payout -- to help you bide your time."

Looking at the 4th quarter earnings report you will see that I have also accepted a less than stellar report, with earnings coming in at $.41 this year, down from $.51/share in the prior year. Revenues did manage to improve slightly to $31.1 billion, up 2.4% from last year's results.

Reviewing the Morningstar.com '5-Yr Restated' financials, we can see the impressive growth in revenue from $40.7 billion in 2004 to $118.9 billion in 2007 and $123.3 billion in the trailing twelve months (TTM). Earnings have grown, albeit a little inconsistently, from $1.77/share in 2004 to $1.94/share in 2007 and $2.26 in the TTM.

Dividends have also been raised yearly from $1.26 in 2004 to $1.47 in 2007 and $1.60 in the TTM. Shares have also grown from 3.3 billion in 2004 to 6.17 billion in 2007 and 6.01 billion in the TTM. Much of this share growth may be attributed to shares issued for acquisitions.

I remember well the original break-up of 'Ma Bell' in 1983 when the seven 'baby bells' were created. In 1998 SBC Communications acquired Pacific Telesis, the baby bell for the western states. In November, 2005, SBC Communications (the old baby bell Southwestern Bell) acquired AT&T and renamed itself AT&T. In 2006, AT&T spent $67 billion to acquire BellSouth.

Like Frankenstein, AT&T has been busy putting its pieces back together
again!

I confess to having a personal attraction to AT&T that transcends the stock and its particulars. Years ago, when my father was still alive, I really believe that AT&T was his favorite holding. He had owned it for many years and enjoyed the dividend stream and the many stock splits over the years. A while back I wrote about him and my own investing experience. But that shouldn't really enter into our own investing decisions, should it?

Let's take a brief look at the 'point and figure' chart on AT&T from StockCharts.com. Here we can see that the stock which corrected rather deeply in September, 2002, dipping to $15.50/share, revisited that low in April, 2003, and then climbed as high as $40/share in September, 2007, and again hit that high in December, 2007, only to dip as low as $21 in October, 2008. The stock has been struggling to move higher, with higher lows but meeting resistance on the upside. The stock is bouncing off the recent low of $23.00 from November, 2008, and now is showing some support at this price point.

click to enlarge

Like most charts these days, the picture is less than encouraging. But if the dividend is secure, something we cannot depend on anymore, the stock may well be support in a bond-like fashion.

In any case, I am now a shareholder, albeit a small shareholder, in an 'old favorite' of, if not mine, my father who while no longer alive was always my main mentor in this stock business.

Disclosure: the author owns T

Comments

[jackooo:]

Wow!! No, double Wow!! Did you pay cash for the 71 shares of T? lol

Feb 24 12:45 PM

[Robert Free...:]

Jackoo,

I paid cash.

I was laughing along with you. Out loud even. My trading portfolio is a portion of my investment holdings in which I try to utilize my own investment strategy in implementing my own approach to buying and selling stocks and identifying useful ideas for myself and others.

It is a common comment on this website to heap ridicule on small amounts of stock purchased or sold. Wisdom does not come from the size of one's transactions any more than from one's belt size.

I hope that I have not wasted your time on these miniscule trades and that you return quickly to your own investment pursuits of far more worthy transactions.

Feb 24 02:43 PM

[jstratt:]

Thank you for your analysis

I happen to agree with you that T is an excellent buy. In this market a stock that has a financial strength rating of A and a 7%+ dividend is attractive. Further S&P gives T a 5 star buy rating.

I would point out that the ATT enjoyed by your father was a different company. However this T has a stable business franchise that seems to do well even in times when other companies are facing a severe retrenchment.

Over the last 10 years I have bought T when it drops, held some and sold some when it commands a dear price. As I plan my retirement income about 10 years out I am accumulating more T to hold. As it stands holding enough T to provide $3000 in income per year in retirement is part of my plan.

Like many other stocks T should never be this cheap. The difference from the others is it has a 50%+ return potential without the level of risk most other stocks contain.

Feb 24 05:42 PM

[Teak:]

I too hold T as a part of a diversified portfolio (24 companies, 1 country ETF, 2 country closed-end funds). My holding in T is only 106 shares of which 100 were purchased and 6 bought via dividend reinvestment.

Don't put too much weight on the criticism of SA readers. I too sometimes throw a complaint or two out there. Some SA articles are a waste of time, and need to be 'called out'. Others are useful. This analysis of T was useful. Thank you, but I am already part of the choir.

Feb 24 08:46 PM

[wittsend:]

In 1968 I inherited 110 shares of ATT. I never bought any with the dividends; but today my ATT stock is worth $200,000.00+.
I guess it paid to hang onto it. I put all 7 companies in ATT and Bell South when it broke up. My father always said the dividends would buy me a pair of shoes some day. I'll still hang onto it.

Mar 01 09:23 PM

[knud:]

Taking small bites in this market is the right way for the average investor to get their feet wet again. Although 1678.44 is small for some, it a lot for others. T pays a nice dividend at this price and is a better then any CD that is being offered by our wonderful BANKS, who help to get us in this mess.

Mar 02 09:07 AM