AT&T (T) is a high dividend stock with a dividend yield of 5.90%. It is a value stock that's mostly owned by defensive investors who tend to protect themselves from potential inflation. AT&T plans to acquire T Mobile (OTCPK:DTEGF), pending approvals, in early 2012. Phill Gross and Robert Atchinson owned over $300 million of AT&T shares at the end of second quarter. Many other famous hedge fund managers, such as Jim Simons, Ken Griffin, D. E. Shaw, and George Soros, have bullish bets in the stock as well. We are going to take a closer look at AT&T and its comparable companies in the telecommunication services industry, including Verizon (VZ), Sprint (S), Telefonica (TEF), Nippon Telecom & Telephone (NTT) and CenturyLink (CTL), to determine which stocks promise higher returns for investors.
The company reported revenues of $31.5 billion for the third quarter of 2011. Per share earnings of $0.61 rose 13% year-over-year. AT&T is expected to earn $2.37 in 2011 and $2.53 in 2012. The stock recently traded at $29.13. Its current P/E ratio is 8.48 and forward P/E ratio is 12.25.
AT&T is expected to grow its earnings by 5.93% over the next 5 years. This implies that its PE ratio using its 2014 earnings is around 10.26. Verizon is expected to grow by 5.41% over the next 5 years and its PE ratio using its 2014 earnings is around 13.05. Telefonica’s expected growth rate is below zero and its corresponding PE ratio is 9.80 by using its expected earnings in 2012. Considering the fact that its earnings are likely to decline in the future, its PE ratio using its 2014 earnings is likely to be higher than that of AT&T. Sprint is expected to grow at 5% but its expected earnings this year and next year are negative. Nippon Telegraph & Telephone is expected to grow by nearly 8.1% and its PE ratio using its 2014 earnings is 6.52. The main reason behind the low PE ratios is its high growth rate. The company grew faster than the industry average and it is expected to continue the strong growth because of its strong fundamentals. Zacks did not provide expected earnings growth for CenturyLink but CTL’s forward PE is above 20. AT&T looks undervalued compared to Verizon and Telefonica. NTT looks to be trading at a discount assuming its growth estimates are accurate.
Volatility is generally used as a measure of risk. AT&T’s beta is 0.44, Verizon’s beta is 0.48, Telefonica’s beta is 1.06, Sprint’s beta is 0.96, NTT’s beta is 0.32, CenturyLink’s beta is 0.78. AT&T’s beta is smaller than most of its comparables and the market. Nippon Telegraph & Telephone has the lowest beta in this group.
Hedge Fund Ownership:
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on average. Sprint was the most popular stock among hedge funds at the end of the second quarter. It was held by 42 hedge funds. Verizon was the second most popular stock with 29 hedge funds bullish about it. AT&T was the third most popular stock. 25 hedge funds (nearly 8% of the funds tracked by Insider Monkey) had bullish bets on AT&T. 23 hedge funds were bullish about CTL, seven hedge funds were bullish about TEF and six were bullish about NTT.
Stocks purchased by insiders tend to outperform the market on the average. CenturyLink was purchased by four insiders over the past six months, while other stocks in the group do not have insider purchases during the same period.
Overall, our analysis points out that Nippon Telecom & Telephone is undervalued and AT&T is slightly undervalued compared to the other stocks in the group. Both stocks also have low risk compared to the comparables. T outperformed the market by one percentage point since the end of the second quarter and NTT even generated a return of 2.77% during the same period when the market was down by 5.58%.
We like AT&T. It’s a boring stock with a high dividend yield but it trades at a discount to regulated utilities stocks such as First Energy (FE) and Duke Energy (DUK) which have 2014 forward PE ratios of 13. T seems like a perfect stock for long-term investors with a focus on dividends. We recommend investors to do an in-depth analysis of the stock for their portfolios.