The telecom sector is reaping the rewards of heavy investment in the wireless segment as it is the fastest growing segment of the industry. AT&T (T) and Verizon (VZ), being the two biggest companies in the sector, have been the primary beneficiaries of this robust growth. As a result, AT&T has gained over 14% over the last 12 months, and about 11% since the start of the year. Let's look at the recent performance as well as future prospects of the company.
Overview of the Company's performance
AT&T is one of the few companies that were not heavily affected by the financial meltdown of 2008, and the stock is close to reaching the pre-recession levels. The company took advantage of consumers' infatuation with smartphones and translated the demand into profits.
AT&T generates revenue through the provision of wireless services, broadband and equipment revenue. The consolidated revenues are reported on the basis of two major segments of service and equipment. In 2012, the company's operating revenue reached 127 billion, an increase of 38% as compared to 2011. The net income showed more than proportional increase of 84% as compared to the last year. The source of increase in earnings was from its core operations, namely provision of wireless services and AT&T U-verse services. The increase in the company's organic revenues is hugely encouraging.
The management restructured its capital by increasing leverage to take advantage of the record low interest rates. The company through this change expects to increase ROE for the coming years. The liquidity of the company also improved as cash from operations showed a huge improvement.
The management plans to rely on innovation and tapping growth opportunities to maximize return on investment. The company continues to rely on the wireless service market and AT&T U-verse by providing new creative services. The Project VIP seems to be the next big step for the company. The project is expected to cover 300 million people by the end of 2014. The idea is to create a broad consumer base in a cost-efficient manner. However, the company faces cut throat competition in terms of market share from Verizon, a major player in the broadband field.
Due to the fears about slowing growth in revenue, the company has recently decided to diversify its operations in the field of home security. It will have to compete for market share with Comcast (CMCSA) as it plans to expand along similar lines. Nonetheless, the management seems optimistic about its competitive edge and seems confident about the upcoming projects.
Dividends and Earnings
AT&T has been one of the highest dividend paying companies on a consistent basis. Last year, it distributed total dividends of $10 billion, and $1.77 in per share dividend. The company has always been dedicated to its dividend payout policy and share repurchases. For the recent quarter, a dividend of $0.45 was declared. At the moment, the stock yields 4.82%.
The free cash flows for AT&T are incredibly strong - the company reported free cash flows of $19.7 billion, and paid cash dividends of $10.24 billion, which puts its payout ratio based on free cash flows at about 52%. The payout ratio is easily manageable and gives the company a lot of room to grow its dividends. Hence, a high-dividend yield backed by a promising EPS guarantees a steady source of income to investors seeking stable returns.
I would suggest a buy recommendation for AT&T for investors seeking stable return with low risk. However, it cannot be denied that the company is exposed to a certain level of risks. Firstly, AT&T is subject to market risk originating from interest rate risk. Radical shifts in consumer demand also pose a major threat to the earnings of the company. The company has taken sufficient measures such as maintaining a high-quality investment portfolio, with investments in derivative and SWAP contracts. Yet, these unforeseen risks cannot be completely eliminated. Secondly, the company has reached a stage of maturity where potential to grow has greatly reduced due to its size and diversified operations. However, I believe the sheer size of the company will help you sail through these risks, and it will be a hugely successful long-term investment.