AT&T (NYSE:T) has taken some flack this past year as investors worry about the company's ability to pay out on its dividends and continue to grow in an increasingly competitive market. Stock analysts are pretty heavily split when it comes to whether or not AT&T stock is worth having. Here we will take a closer look at the company's current financial position relative to competitors as well as its strategy for future growth.
Financial outlooks in comparison:
Increasing competition, especially from Verizon (VZ), has resulted in increased pressure that can be felt in the stock market. AT&T's stock closed at $33.89 on December 13th, while Verizon's closed almost $15 ahead at $48.13. But stock price alone is not enough to determine which company is faring better.
While Verizon has seen a lot of growth and has recently been adding more subscribers, its price to earnings ratio of 62.95 is a lot higher than we would like. The current mean price to earnings ratio of the market is 15.00 and in order for its growth to be considered sustainable, a company should never have a P/E ratio more than three times higher than the mean. Furthermore, it should on no account be above 43.00.
With a price to earnings ratio of 24.04, AT&T falls perfectly within a safe range and shows itself to potentially be a much safer investment than Verizon. AT&T also promises more stability when we compare the debt to equity ratios of the two competitors. Analysts vary on what a healthy D/E ratio would be, but the more liberal opinions put it at 1.5. AT&T comes in well under that figure with a debt to equity ratio of just 0.89, while Verizon has an uncomfortably high 2.83.
AT&T has also increased its quarterly dividends by 2.2% continuing its 30-year trend of doing so. This increase has boosted its dividends to 5.31% putting it in the much desired category of stocks with dividends above 5%. For comparison, Verizon's stock falls a bit below this mark with dividends at 4.43%.
Strategies for future growth:
We cannot make an educated decision by numbers alone. Without solid strategies for future growth, it doesn't really matter how well a company is doing at present. And when it comes to strategy, competition is very tough.
Verizon has recently closed a deal with Vodafone (NASDAQ:VOD) to buy out the 45% stake it had in Verizon's company. This means Verizon can now benefit total ownership of its wireless division. We will start to see the benefits of this at the close of the first quarter in 2014. Between that and the better reputation Verizon enjoys relative to AT&T, it seems to be positioned to dominate the market.
But some analysts argue that this view is overly optimistic, as AT&T still has more subscribers than Verizon and has some plans of its own to increase growth.
AT&T has already partnered with General Motors (NYSE:GM) and Tesla Motors (NASDAQ:TSLA) in order to provide its wireless service in vehicles. Plans to equip all General Motors vehicles with AT&T wireless service by the summer of 2014 should result in a fairly substantial boost in the company's earnings.
AT&T is also currently working on deals with other automobile manufacturers such as BMW (BAMXY), Nissan (OTCPK:NSANY), and Ford (NYSE:F). By making deals to branch out into automobiles, AT&T is shoring up its profits against potentially rough competition from both Verizon and smaller wireless service providers, which have recently posed a threat to the larger companies with their aggressive marketing and increased investments in technology development.
While Verizon has continued to outperform AT&T in the stock market recently and has secured its growth in the future with its Vodafone deal, this does not mark the end of AT&T's reign. The company has been working on some beneficial deals of its own and its expansion into the emerging and potentially highly profitable telematics market should solidify its growth well into the future.
And with increasing dividends and a more secure financial position (in terms of its debt to equity ratio as well as its price to earnings ratio) relative to Verizon, AT&T has a lot to offer potential buyers and current stockholders. With all that in mind, despite its less than stellar performance currently, AT&T's stock is still a good buy and has a lot of promise for the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.