Size Matters at AT&T -- Looking Good Post-Acquisition

Investopedia Advisor submits: Bigger is better in the telecom world, and AT&T is one good-looking behemoth.

Back in March, I pointed out that AT&T’s (T) acquisition of Bellsouth (BLS) was no blunder. Potentially delivering $8 billion in new value, the deal looks good for shareholders. Well, the market agrees. Since then, AT&T shares have gained 20%, boosting the telecom giant’s market value by more than $20 billion.

AT&T shares have performed well over the past six months, and I expect them to add more value over the coming quarters. Sure, competitive conditions are horrible and there have been grueling rounds of consolidation since the great telecom market collapse of 2001 tested shareholders' patience. But with its biggest deals out of the way, AT&T will likely continue to realize synergies and much improved profitability.

By removing competitors, as AT&T did with the Bellsouth acquisition, the telecom has the luxury of cutting costs with little fear that a competitor will spend more to poach customers. At the same time, now that the telecom crowd has shrunk to just a few top players, pricing conditions are improving for the first time in well over a decade.

AT&T has raised its forecasts for full-year profit margins and the savings it expects from the AT&T-SBC merger. The company plans to save as much as $900 million this year; previously, it had expected savings of $600 million. Assuming AT&T can keep up its strong integration track record, investors can hope for more savings from the Bellsouth deal.

Size matters in the telecom business. For AT&T, which generates more than $40 billion in annual sales, an extra percentage point or two to profit margins can add up very quickly. Of course, AT&T and Bellsouth continue to lose hundreds of thousands of local telephone line customers every month. Many customers are turning to cheaper alternatives offered by cable providers such as Comcast (CMCSA) and internet players like Vonage (VG). That said, many others are signing up for high-speed internet services from AT&T and for wireless services from AT&T’s Cingular business. For the next several quarters, growth from internet and wireless services and eventually video, when combined with cost-cutting, should offset phone line losses.

The acquisition of Cingular and the integration of AT&T Wireless put the new AT&T at the top of the US wireless industry. With roughly as many subscribers as close rival Verizon (VZ), AT&T’s 100%-owned wireless business stands to benefit more from wireless market growth than Verizon.

Best of all, with a whopping 4.5% dividend yield and $10 billion buyback program in place, there is little share price risk from here. It’s not too late to tuck away some AT&T shares.

T 1-year chart:

By Ben McClure, Contributor - Investopedia Advisor

At the time of release Ben McClure did not own any shares in any of the companies mentioned in this article.