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Summary

  • Company effectively addressing competition along with delivering satisfactory performance.
  • AT&T successful with measures to stabilize the performance of its wireless segment.
  • Investors attracted to stock with its high dividend yield of 5.3%.

AT&T (NYSE:T) is among the leading telecom companies in the industry. Despite the ongoing tough competition, the company has been doing well to deliver a healthy performance. I reiterate my bullish rating on T, as the company continues to post healthy results and dominate the industry. The company's wireless segment, with its "Next" program, succeeded in adding 625,000 total postpaid subscribers, resulting in a 3.6% year-on-year increase in total revenues. Moreover, wireline consumer revenues were up 4.2% year-on-year in the recent first quarter, reflecting the benefits of the VIP program by making a record contribution to T's overall revenue base since the introduction of U-verse technology. In the recent quarter, an overall bright picture of revenues and underlining margins, coupled with aggressive share buybacks also portends well for the company's bottom line results. Moreover, the company offers a solid dividend yield of 5.3%, backed by its strong cash flows.

Wireless Remains Growth Engine, Wireline Stabilizing

The company's wireless segment remains its main growth driver. Also, competition in the wireless segment remains intense, as all key players are relying on price wars and improved service qualities to boost their subscribers and top line numbers. T has been addressing the intense competition in the segment by offering discounts through Mobile Share Value services of the Next program. However, the initiative resulted in a 1.9% year-on-year drop in ARPU for the segment in 1Q2014, but helped the company add 625,000 net postpaid subscribers and resulted in a 7% year-on-year increase in the segment's revenues. The following table shows revenue growth, postpaid subscriber net additions and ARPU growth for T's wireless segment.

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

Revenue(Y-O-Y) Growth)

3.4%

5.7%

5.1%

4.5%

7%

Net Additions(Y-O-Y Growth)

(59.9%)

(50.1%)

45.9%

(26.1%)

265%

ARPU(Y-O-Y Growth)

0%

1.3%

0.8%

1.4%

(1.9%)

Source: Company's Quarterly Earnings Report and Calculations

Due to secular changes, including the growth of wireless services and intense competition from cable operators, the company's wireline segment has been struggling to expand its revenues and subscriber base. However, the company has been taking initiatives to stabilize the drop in the wireline segment revenues. The company's wireline segment revenues are being positively affected by U-verse. In the recent first quarter, the company had the best wireline consumer revenue growth of 4.2% year-on-year since the introduction of U-verse in 2006. Due to the company's efforts to improve the wireline segment's results, the segment's revenue drop has moderated to 0.4% in 1Q2014, as compared to a 1.8% drop in 1Q2013. Also, ARPU for the wireline segment increased by a healthy 8.3% year-on-year in 1Q2014. I believe that as the company continues to invest in expanding U-verse technology as part of project VIP, it will portend well for the segment's performance. The following table shows moderating revenue growth trend, net additions and ARPU growth for the wireline segment.

1Q-13

2Q-13

3Q-13

4Q-13

1Q-14

Revenue(Y-O-Y Growth)

(1.8%)

(0.9%)

(1%)

(1.4%)

(0.4%)

Net Additions(Y-O-Y Growth)

(11.1%)

(11.5%)

(11.2%)

(9.8%)

(10%)

ARPU(Y-O-Y Growth)

7%

7.1%

6.7%

7%

8.3%

Source: Company's Quarterly Earnings Report

The company's overall stable margins in the recent quarter were largely supported by margin expansion in the wireless segment, which nearly offset the pressurized wireline segment margin base. A solid subscriber base and growth in revenues of the wireless segment, due to initiatives like "Next," resulted in a 5% year-on-year increase in EBITDA margin. Whereas the wireline segment's EBITDA margin was pressurized by the company's ongoing spending on the VIP project. I believe margin for the wireline segment will be pressured as the company continues to spend on its projects, like VIP. The following chart shows the EBITDA margin trend for T's wireless and wireline segments.

Source: Company's Quarterly Earnings Report

Capital Expenditure Remains High

In 1Q14, the company's total CAPEX reached $5.8 billion. High capital spending is consistent with the tough competition within the industry and services improvement and growth initiatives like project VIP. Moreover, the company completed the LEAP acquisition in March, and it is expected that T will spend approximately $21 billion in 2014. The integration benefits from the LEAP acquisition are likely to be fully realized by the company in 2015.

In addition to its long-term growth generating investments, the recent announcement of the company's joint venture with the Chernin Group will cost AT&T $500 million. I believe the joint venture will improve T's churn rate by satisfying the growing demand of customers to get online video content access whenever they want. The following chart shows the changes (year-on-year) in both the segments' CAPEX in the recent four quarters.
Source: Form 10-K and Calculations

Attractive Shareholder Return

The ongoing CAPEX spending has put pressure on the company's cash flows; however, I believe the dividend is safe and stable. The company generated $3.08 billion of FCF in 1Q2014, consistent with its full year FCF guidance of $11 billion. The company currently offers a high dividend yield of 5.3%. Other than the attractive dividend yield, the company has been undertaking share repurchases to support its EPS growth. In 1Q2014, the company repurchased approximately 37 million shares and announced another share repurchase program of 300 million shares, which represents 6% of common shares outstanding. The ongoing share repurchases will magnify ROE and boost the company's EPS in the future.

The following graph shows dividends offered by the company as a percentage of FCF.

Source: Calculations and Company's Quarterly Earnings Report

The following chart shows the comparison of T's dividend yield with key players Verizon (NYSE:VZ) and China Mobile (NYSE:CHL).
Source: GuruFocus (T, VZ, CHL)

Conclusion

The company has been delivering satisfactory performance in the recent past and is effectively addressing competition. T has been slowly and consistently growing its revenues and earnings base. Also, the company has been making efforts to further improve the performance of its fast growing wireless segment and taking successful measures to stabilize the performance of its wireless segment, which has been suffering due to secular changes. Also, the stock remains an attractive investment option for dividend-seeking investors, offering a high dividend yield of 5.3%. Due to these factors, I am bullish on the stock.

Source: Consistent Performance In Growing Revenue And Earnings Base Key To Bullish Rating On AT&T