AT&T: A Surprising Investment Choice

| About: AT&T Inc. (T)

Today's AT&T (NYSE:T) is not your father's AT&T, but it's not far off, either.

Many remember the company as the bloated monopoly that offered traditional local and long-distance phone service across the country before government anti-trust forces broke it up in the early 1980s.

AT&T Today

Today, it has almost as much reach in the wireline market as back then, with customers in 22 states using its telephone, Internet and Voice over Internet Protocol (VoIP) services, making it the largest wireline voice communications service in the country. Yet little of that is from the traditional voice market, as 81% of revenues are from wireless, wireline data and managed IT services.

It now also includes AT&T Mobility, which is the second largest U.S. mobile carrier behind rival Verizon Wireless (NYSE:VZ). AT&T's wireless business accounts for 54% of the overall company's revenue. Year-over year, AT&T has grown its total wireless subscribers by 3.8 million, to 107 million. During the fourth quarter, AT&T added 1.1 million net wireless subscribers.

AT&T trails Verizon in the deployment of the preferred 4G-LTE platform. It's working to catch up. In the meantime, the company continues to offer stability and growth potential, generates decent cash flow, and pays out a nice dividend.

AT&T reported a net loss of $3.9 billion for the fourth quarter of 2012, far less than the $6.7 billion in lost in the same quarter in 2011. For the full year, the company earned $7.3 billion, up from $3.9 billion in 2011. It set records for full year operating cash of $39.2 billion and free cash flow of $19.4 billion. The company's last three quarterly earnings levels have beat analysts projections by about 5% each time.

AT&T anticipates high single-digit earnings per share growth and low single-digit revenue growth in 2013. Free cash flow is expected to decline to $14 billion, primarily due to increased capital expenditures of $21 billion. Those capital expenses are mainly focused on expanding the company's 4G LTE network, which is less than half the size of Verizon's.

AT&T's long-term estimated earnings growth rate of 6% is notably below the average estimate of 8.2% for S&P 500 companies. However, the company possesses a solid market position and the stock's dividend yield is markedly above the market average.

AT&T boasts better than industry averages for 12-month net profit margin (5.9% to 0.04%), five-year average net profit margin (9.2% to 7%), five-year average return on assets (4.6% to 3.2%), and five-year average return on investment (7.4% to 5.7%). It also has a lower debt-to-equity ratio than the industry average (0.63 to 0.95).

AT&T continues to reward investors on both the return on their investment and the income they receive from dividends. Shares are currently trading between $35 and $36 a share, about 17% above where they traded a year ago. Furthermore, in 2012, AT&T returned $23 billion, about 11% of its market cap, to shareholders via dividends and share buybacks. It offers a $0.45 quarterly dividend with is currently yielding about 5%. Analysis of AT&T free cash flows indicates that the company has room to increase its dividend payments. At the moment, the payout ratio is manageable at 60% of free cash flows. Furthermore, there is an increasing trend in the free cash flows of the company, which indicates that the payout ratio may come down in the future.

In the all important wireless segment, AT&T grew its year-over-year revenue by 5.7% and posted a net increase of more than 1 million wireless subscribers in the fourth quarter. It now boasts about 107 million wireless subscribers.

The company also announced that it sold a record 10.2 million smartphones in the fourth quarter. This had a somewhat negative impact on earnings, due to expensive subsidies paid to encourage smartphone purchases and contract activations.

Not Just Wireless

AT&T is able to bank on more than just wireless service. With its growing home Internet service, the company experienced a 3% revenue increase from residential customers, totaling $5.5 billion for the fourth quarter.

The company is also growing its U-verse TV service. The company is the only national service provider offering a 100% Internet-based TV service. One of the benefits the company touts with its service is that the receiver operates completely wirelessly, meaning you could place a TV anywhere in your house and it would pick up the digital signal from the U-verse wireless receiver.

Since 2009, AT&T U-verse added more TV subscribers than any of the major TV providers, according to the company. U-verse added 192,000 TV subscribers in the fourth quarter to 4.5 million, while its high-speed Internet added 609,000 subscribers for a total of 7.7 million. About 90% of new U-verse TV customers sign up for the high-speed Internet service.

AT&T generates one of the highest rates of cash flow in the industry. Whereas its chief competitor Verizon's cash position fell in 2012, AT&T's grew from $3.18 billion in 2011 to $4.87 billion in 2012.

AT&T recently announced the purchase of Alltel's U.S. operations for $780 million. The deal gives AT&T an additional 600,000 customers through Alltel's wireless operations. More importantly, AT&T acquired more spectrum in key cellular frequencies. This is an important development, given that a similar planned purchase of T-Mobile in 2011 fell through.

The New AT&T

AT&T may not have the network size of Verizon Wireless and, based on its history, may have a reputation for not being able to adapt to the changing communications world. But the reality is that today's AT&T is unlike its former self in the businesses and services it provides, but much like its predecessor in the value it provides to its shareholders.

Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.