Seeking Alpha
Long only, deep value, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)  

Summary

  • Trading at the lower-end of its range, AT&T offers compelling value and a yield near 6%.
  • The CEO's recent endorsements of the stock and company's strengths support this claim.
  • Dividends and capital appreciation offer 10% to 15% returns.

This article on AT&T (NYSE:T) was written two weeks ago, alerting investors that a magical point is nearing. While nothing much has changed in terms of share price since then, there have been a few more positive developments for the stock. This article covers those positives, along with a few points that were not covered in the article linked above. Let us get into the details.

CEO's Endorsement #1: AT&T's CEO recently presented at a Morgan Stanley conference. While he talked about a variety of aspects, including growth drivers, one point that stands out is his open support for the stock at the $32 mark. Mr. Stephenson openly stated that the company will be buying back shares in the open market at the $32 level. Even though the buyback rate has fallen down recently, AT&T is no stranger to buybacks, as shown in the chart below. The count has gone down 11% in the last 2 years, after staying nearly flat for 3 years.

(click to enlarge)

(Source: YCharts.com)

SA Contributor Alexander Poulos has covered this point in detail here. It is not hard to understand why the CEO believes shares are attractive here. The stock yields almost 6% at this level, and an upcoming dividend increase towards the end of the year will push the yield further.

CEO's Endorsement #2: During the same presentation, Mr. Stephenson also touched upon the free cash flow strength of the company. Notice that he did not talk about earnings, but free cash flow. A capital-intensive business like AT&T is almost always going to have a drop in earnings. That is why the company and investors need to be aware of the free cash flow strength.

This article covered AT&T's free cash flow strength, as it stood at that time. Since it has almost been 6 months since then, let us look at the free cash flow strength that the CEO is talking about.

  • AT&T's current shares count is 5.2 billion.
  • The most recent quarterly free cash flow amounted to $2.53 billion. The lowest quarterly free cash flow over the last 5 years remains at $2.2 billion. The average quarterly cash flow has fallen to $4.03 billion, while the maximum remains at $6.45 billion.
  • The current quarterly dividend per share is 46 cents, and multiplying that number by the current outstanding shares count, we get a dividend requirement of $2.3 billion.
  • These numbers put together convey a simple but powerful message. AT&T's recent, minimum (almost), average, and maximum quarterly cash flows sufficiently cover the quarterly dividend commitment to shareholders.

Price Target: According to 25 analysts on Yahoo Finance, AT&T's price target is $35.54, which represents 10% upside from here. Trefis.com has a price target of $38, which represents a 17% upside. Analyst estimates have also been revised to the upside quite a few times in the last 30 days as shown below.

(Source: Yahoo Finance)

Technical Indicator: After flirting with the overbought territory towards the end of 2013, AT&T's Relative Strength Index (RSI) is reaching into the 40s, as of this writing. This indicates selling exhaustion is pretty near and that the stock could see more buyers. This lends credibility to the common opinion that the stock's support is at the $31 to $32 range.

(Source: Nasdaq.Com)

Price War - A Minor Victory: Let us get it straight that no company likes to slash prices. But we've seen an intense price war between AT&T, Verizon Communications (NYSE:VZ) and T-Mobile US (NYSE:TMUS) recently. It is very obvious that this sector is no longer about margin, but about volume. That is, attracting more customers and retaining them for continuous revenue, which aids the free cash flow discussed above. In this war, it seems like T-Mobile has blinked first, as it has become the first company to increase prices recently. If history is any indicator, companies with deeper pockets usually win the price wars.

Conclusion: So, do you believe these continuous endorsements for the stock at the $31-$32 level is a reason to buy the stock here, or do you want to stand away from the crowd? Please leave your comments below.

Source: AT&T: More Positives For The Stock