Recent Buy - AT&T Inc.

Aug. 7.14 | About: AT&T Inc. (T)

Summary

AT&T, the top Dog of the Dow, provides a great source of income.

Media and in-car 4G connectivity will drive revenue growth.

Risks include unknowns on the DirecTV acquisition, capex etc.

I initiated a new position in AT&T Inc (NYSE:T). AT&T barely needs an introduction, being the behemoth ($184B market cap) in the telecommunications sector. AT&T is one of the 30 companies that compose the Dow Jones Industrial Average (DJIA), a yardstick to measure the health of the economy. This is the fourth DJIA stock in my portfolio, following Chevron (NYSE:CVX), General Electric (NYSE:GE) and Johnson & Johnson (NYSE:JNJ).

I initiated a position in AT&T with 40 shares, and with a yield of 5.16%, which adds $73.60 to my annual dividend income. This is about half the position I am comfortable owning in each stock, and will be looking to add more in the future if better opportunities appear.

Corporate Profile (from Yahoo Finance)

AT&T Inc. provides telecommunications services to consumers and businesses in the United States and internationally. Its Wireless segment offers various wireless voice, data, text, and other services, including local wireless communications services, long-distance services, and roaming services. This segment also sells various handsets, wirelessly-enabled computers, and personal computer wireless data cards through its owned stores, agents, or third-party retail stores; and accessories comprising carrying cases, hands-free devices, batteries, battery chargers, and other items to consumers, as well as to agents and third-party distributors. As of December 31, 2013, this segment served approximately 110 million wireless subscribers. The company's Wireline segment provides data services, such as switched and dedicated transport, DSL Internet access, network integration, managed web-hosting, packet, and enterprise networking services, as well as local, interstate, and international wholesale networking capacity to other service providers. This segment also offers voice services consisting of local and long-distance services; wholesale switched access services to other service providers; and outsourcing services, integration services and customer premises equipment, and government-related services. This segment served approximately 12 million retail consumer access lines, 10 million retail business access lines, and 2 million wholesale access lines. The company has a strategic relationship with IBM to provide businesses with a source for network security and threat management. The company was formerly known as SBC Communications Inc., and changed its name to AT&T Inc. in November 2005. AT&T, Inc. was founded in 1983, and is based in Dallas, Texas.

Dividend Profile

AT&T is a Dividend Aristocrat & Dividend Champion, having raised dividends for 30 years in a row. The stock is a high-yielder (current dividend is 5.31%), and as a result, the dividend growths are comparatively smaller. The 5-year dividend growth rate (DGR) is 2.4% and 10-year DGR is 4.9%.

Recent Buy Decision

Investing in AT&T bolsters my portfolio with more exposure to the telecom sector - which I am bullish on. The company is the leader in the telecom world, but the current environment provides for some interesting points. Some of the factors that contributed in my decision to initiate this position.

  • Dividend income - AT&T provides great current income, with prospects of dividend growth in the future.
  • Dogs of the Dow - Some people use this investing strategy to beat the market. While my main goal is not to beat the market, this strategy provides some visibility into the under-to-fairly valued stocks in the DJIA. The strategy, for those unfamiliar, is simply to invest in the highest yielders of the DJIA, called the Dogs of the Dow. AT&T is the currently the highest yielder in the DJIA.
  • Solid revenue growth and EPS growth: After minimal gains from 2009-2012 in revenue, and a dip in diluted EPS from 2010 to 2011, AT&T has turned the ship around, and the current trend is pointing upward.
  • DirecTV (DTV) acquisition - AT&T announced that it intends to acquire DTV, which could provide it with considerable amount of revenue growth in the future.
  • Possibility of REIT spin-off - The recent news of Windstream (NASDAQ:WIN) spinning off a publicly traded REIT resulted in speculation that other telecom providers would follow suit. If AT&T follows in the footsteps of WIN, that would result in unlocking a lot of value for shareholders.
  • In-car 4G LTE - AT&T has been at the forefront in this field, having secured deals with car manufacturers such as Audi, Tesla (NASDAQ:TSLA), General Motors (NYSE:GM) etc. AT&T could potentially add millions of new subscribers to its customer base, as the current and future generation of cars come with 4G LTE-capability.

The bottom line is that the companies that control the data pipes in an ever-connected and integrated digital world will command the marketplace. Telecom service providers (alongside cable service providers) will be able to throw their weight around and demand a piece of the pie from the hi-tech media companies, as was evident from the recent announcement from Netflix (NASDAQ:NFLX) - that Netflix has agreed to pay AT&T a fee to provide better streaming services to customers, for an undisclosed amount. Read more about my thoughts here.

Risks

  • The DirecTV merger comes with a lot of unknowns. AT&T is betting that it can grow its revenues and business with the acquisition of DirecTV. However, it remains to be seen how this will play out once approved.
  • Capital expenditure is high, and while T had indicated earlier this year on a free on capex, it has been forced to spend more in order to keep up and compete with others in the marketplace.
  • Free cash flow has dropped this year.

A summary of the stock:

  • Symbol: T
  • Quote: $34.62
  • 52-week range: $31.74-$37.48
  • P/E: 10.17
  • Forward P/E: 12.73
  • Debt/Equity: 0.91
  • Yield: 5.31%
  • 5-yr. average yield: 5.5%
  • 5-yr. DGR: 2.4%
  • Book value: 17.75
  • Graham number: 36.85
  • Chowder rule: 8

Do you own T? What are your thoughts on the sector and the industry? Make sure to leave a comment below.

Full Disclosure: Long CVX, GE, JNJ, T. My full list of holdings is available here.

Disclosure: The author is long T. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.