This article is part of an ongoing series that highlights specific companies that are on sale. It helps me to document my thought processes when I add to my holdings or initiate new positions. Please provide your feedback in the comments section below.
AT&T (NYSE:T) is currently offering investors an opportunity to buy portions of the company at under $34/share. The stock has been steadily declining for the past six months, but has been consolidating in the $33-$34 level for the past month and may provide a good entry point. This is a over 10 percent off the 52-week high, hit about six months ago at $38 per ownership interest. This six-month decline and recent consolidation provides long-term investors with a good opportunity to initiate a position.
AT&T has a business model that is simple and sustainable. It provides telecommunications services and equipment to businesses, governments and consumers. It is probably most well-known for its wireless cell phone services. According to the 2012 Annual Report, revenue grew 2.5 percent year over year, and earnings grew 8.5 percent.
Despite the growth, I believe that AT&T trades at a discount to its true valuation. AT&T currently trades at 25 times trailing-12-months' earnings, but under 13 times projected next year earnings. EPS is expected to grow over 8% next year and over 6.5% annually for the next five years. It also trades at under 20 times free cash flow. AT&T reported record cash from operations and free cash flow in 2012. AT&T will be reporting Q3 earnings on October 23, and I believe that it will have a positive surprise. I believe that this will be the catalyst that will propel AT&T's stock higher. In the meantime, I am content to accumulate shares at this perceived discount.
Additionally, AT&T is turning into a cannibal! T has been buying back its own stock at a pace that dominates most businesses. According to the 2012 Annual Report, AT&T repurchased 6 percent of its total shares outstanding in 2012. At the beginning of 2012, there were 5.93 billion shares outstanding. Just one year later, that count had dropped to 5.58 billion. This 6 percent drop is a huge percentage, where most companies tend to buy back a percent or two.
With AT&T planning to buy so much of its outstanding shares, let's look at how that will affect earnings. Analyst expectations are very low. Analysts are expecting a consensus EPS of $0.65. That's two cents per share less than last quarter's EPS. Analyst consensus for revenue is $32.2 billion, which is almost flat with the prior quarter's revenue of $32.1 billion. It doesn't appear that analysts are expecting much, if anything, from AT&T. With AT&T's large share buyback activity, it wouldn't have to make more in total earnings to affect the bottom-line EPS. I believe that AT&T will have a positive surprise, and this is the catalyst that will cause AT&T's stock to break from its trading range and close substantially higher at the end of 2013.
Additionally, AT&T has an above-average yield. You literally get paid to wait. AT&T has a current yield of 5.33%. During the financial crisis, AT&T did not cut its dividend. In fact, it raised the dividend. AT&T is a Dividend Champion and has raised its dividend every year for 29 years. AT&T is both a buyback king and a dividend king!
Additionally, AT&T refinanced $12 billion of its debt in 2012, taking advantage of historically low interest rates, according to the annual report. This lowers the interest payments of the company. Combined with its record free cash flow and share buyback activity, it seems clear that AT&T has the liquidity to continue funding and increasing its dividend. In fact, AT&T has continued buying back stock throughout 2013. Today, there are only 5.3 billion shares outstanding, or 5% less than there were at the beginning of the year. I believe that AT&T will beat earnings estimates, which will be the catalyst needed to propel AT&T's shares higher.
As always, this article represents my opinions at the time of writing. You should do your own due diligence before making any decisions. However, I believe that AT&T represents a quality company that is trading hands at a discount.
Disclosure: I am long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.