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Summary

  • Wireless division seems to be gaining steam and analyst estimates are going up.
  • End of the year dividend increase might be more than the usual 2% to 3%.
  • The stock is still attractive, especially if you believe a pullback is due.

AT&T (NYSE:T) has been in the thick of action in the last few months, most notably for the DirecTV (NASDAQ:DTV) deal. Investors have had enough time to evaluate this deal and so far the market seems to like the deal. However, AT&T's stock has not seen much activity recently as it is stuck in the $35 to $36 range for the past two months.

This article argues that this is indeed good for long-term investors as the stock looks appealing for the reasons mentioned below. Let us get into the details.

Revenue Outlook: This is straight from the horse's mouth. AT&T this morning increased its 2014 revenue guidance backed by strong wireless sales. This is significant because AT&T is showing it can still grow its core business without relying on acquisitions. AT&T (most likely) added 800,000 subscribers, which is a 45% increase from the 551,000 added at the same time last year. In spite of this news, the stock is trading down pre-market.

Dividend Increase: AT&T investors know well that the company has put together a three decade long dividend increase streak. Although the dividend growth rate has slowed down to about 2% per year recently, there is reason for optimism this time with the DirecTV deal. As explained in this article, the deal could end up increasing AT&T's free cash flow, which will likely have an impact on the dividends. Why is this important now? The dividend increase will be announced in the next couple of quarters and buying at $35 would give investors a yield on cost of about 5.35% even if the dividend increase stays anemic at 2%.

Analyst Estimates: AT&T's 2014 and 2015 EPS estimates are being revised to the upside as seen in the table below. This is important for two reasons:

  • These days, it is hard to find companies where estimates are going up. Usually, analysts have an overly optimistic estimation and the numbers are watered down as the results approach. When the opposite happens, you know the stock is undervalued.
  • If 2015 estimates hold true, AT&T is trading at a forward multiple of 12.5 based on current share price of about $35.

(Source: Yahoo Finance)

Crash Proof: Okay, that is an exaggeration as no stock is impervious to market euphoria. But with more people calling for a market top, some investors might feel the need to bring in a bit more safety to their portfolio. AT&T has got three important factors that cushion investors during a market meltdown:

  • Staple: Yes, you read that right. Even in case of a meltdown, it is hard to imagine this generation doing away with cell phones and wireless. AT&T is basically a staple stock in the name of technology/telecom.
  • Beta: A low beta of 0.30.
  • Fat yield: Try getting a relatively safe 5.30% yield anywhere else with some potential for capital growth too.

Technical Indicator: AT&T's year-to-date chart below shows the Relative Strength Index at 30, which is the textbook level for being considered oversold.

(click to enlarge)

(Source: Yahoo Finance)

Conclusion: So, are you a believer in AT&T ? With the recent numbers as well the DirecTV deal, we believe this stock offers enough potential for capital appreciation in addition to those juicy dividends. It is hard to pass on such a stock.

Source: AT&T: 5 Reasons We Are Interested Again