AT&T: Interesting On A Total Return Basis

Mar.13.14 | About: AT&T Inc. (T)

Summary

Concerns about competitive weakness overblown.

The company has CapEx tailwinds and value-driven on subscribers and Europe.

Tailwinds on both earnings and dividend suggest AT&T as a good total return play.

The market is at all-time highs, but tinged with nervousness. Commodities (copper and iron) are breaking down, as is oil. This, and a rise in the bond market suggests an economic slowdown, and perhaps something brewing in China. Given all this, you'd think a dividend payer with steady revenue such as AT&T (NYSE:T) would be viewed favorably. For some reason, the market sees AT&T as a glass half full - with concerns about subscriber loss, revenue mix and lack of a European strategy amongst other things. Here are a few excepts from AT&T 's most recent 10-K that suggest the company is in much better shape than sentiment suggests, and may be the kind of "spicy" dividend payer that will reward you on a total return basis.

Healthy Product Mix. The latest 10-K suggests that AT&T is well on its way to turn into a pure play wireless company, with some reasonably healthy wireline services around broadband and cable. Even though the revenue between wired and wireless is currently balances (54% wireless, 46% wireline), already about 75% of the profits come from wireless. This wireless profit number has grown rapidly from 50% to 75% in only two years, so the trend is a friend.

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Churn Fairly Steady. There is much angst about the switching battle between T-Mobile and AT&T, and how this might hurt AT&T both in the near term (in incentives) and long term (non-contract plans). While the former might have some legs, AT&T's churn rate has held quite steady, suggesting that the T-Mobile concern is overblown. Additionally, AT&T's CEO has repeatedly mentioned that coverage and service quality are the primary customer priorities in their market surveys. This is borne out both my direct and indirect social network.

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4G CapEx soon to be in the past. While AT&T's earnings show steady to slow growth, the 10-K suggests that the CapEx (mostly 4G related) spend peaked at about $21B early this year and is going to fall back to the $19-20B historical number. With the 5B or so shares float, that is a tailwind of about 20 cents per share on T's stock going forward.

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Valuation. T has been in a trading range between $32 and $36 over the last year. At $32 and change, it is currently trading very close to the lower end of this fairly well-defined trading range.

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In a time of potentially higher volatility, T gives you about 6% dividend, the potential of 10-12% capital gains over the next 12 months, and dividend tailwinds from reduced CapEx.

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.