By Robert Gordon
AT&T, Inc. (NYSE:T) is among the world's largest telecommunications holding companies, and the largest such company in this country. It was formerly known as SBC Communications, which upon acquiring the old AT&T in 2005 rebranded itself as AT&T, Inc. AT&T took on its current size by acquiring for $67 billion in 2006 the former BellSouth, Inc.
AT&T runs traditional landline phone services in 13 states, but that is a heavily regulated and utterly predictable business. The landline unit's revenues and profits have been falling by double digit percentages in recent years, due largely to landline's lack of competitiveness with wireless. AT&T has bet the company on wireless, so that is what this article will look at more carefully.
AT&T stock was trading recently at about $29. Its narrow 52 week range is from $31.94 to $27.20, and its market capitalization is about $171 billion. It has a P/E of 14.6, and pays a quarterly dividend of $0.43 per share, for an annual yield of 5.9%.
AT&T had a fine third quarter to 2011. Its revenues were essentially flat year over year, at roughly $31.5 billion. But the company's consolidated operating profit margin increased 260 basis points, to 19.8%. That allowed per share earnings to rise 13% to $0.61 in the quarter. Many things went right for AT&T in the quarter. Total wireless subscribers increased about 8 million year over year to over 100 million for the first time in T's history, and there was over $5 billion of free cash flow.
Taking a longer, five year view, other than through acquisitions, there has not been much revenue growth, and when adjusting for inflation, no growth at all. In the first year after the BellSouth purchase, 2007, AT&T reported just under $120 billion in revenue; in 2008, $124 billion; in 2009, $123 billion; and in 2010, $124.4 billion. For its full year 2011, the mean analyst estimated revenue is $126 billion, and for full year 2012, $127.8 billion. That is an average revenue growth rate of 1.5% per year, not accounting for inflation. Negative inflation-adjusted revenue growth is no way to run a company, in my opinion. This lack of growth has been particularly galling as during much of the time at issue, from 2007 until 2011, AT&T had exclusive rights to sell Apple Inc.'s (OTC:APPL) wildly successful iPhone. No doubt weighing against T's ability to grow its revenues, recent consumer advocacy magazine articles have ranked T's wireless to have the least satisfied customer base of any national wireless carrier for several years in a row.
Other numbers of interest to me are T's return on assets and return on equity. AT&T's return on assets for the trailing 12 month period was 10.54%, and its return on assets was 4.64%. Neither of these numbers impresses me at all.
The other big uncertainty in AT&T's future is its proposed acquisition of T-Mobile Wireless from Deutsche Telecom (OTCQX:DTEGY). Under the terms of the deal, announced in March, 2011, T was to tender roughly $39 billion in cash and stock to DTEGY for its T Mobile unit, and both boards approved the deal. But in the third quarter of 2011, the U.S. Department of Justice filed suit against the purchase, saying it had uncompetitive elements. The Federal Communication Commission later agreed with the DOJ's opinion. Trial on the matter is scheduled for February 2012. T's interest in the deal is largely the addition of spectrum bandwidth that T Mobile would bring.
If the deal fails, however, there are built-in break-up penalties. To AT&T, those penalties would be as much as $6 billion, plus the loss of some precious spectrum rights to DTEGY. Putting aside for now the benefit of hindsight (surely DOJ objections were foreseeable), the parties can always pursue some compromise settlement, which T would undoubtedly seek if and when it becomes convinced, as I have, that it is unlikely the merger will ever be approved.
AT&T has made a commitment to finally whittle down the debt burden that ballooned when SBC Communications first acquired it. That is not the easiest thing to do, when the capital requirements of maintaining and improving a nationwide wireless network is hardly cheap. AT&T spent $23 billion in 2010 on network expansion and maintenance. Long-term debt levels have fallen from roughly $64 billion in 2010 to $62 billion today.
AT&T's generous dividend has been raised annually since 2004, and given the stability of T's business, is the principal appeal of this stock. That, a solid balance sheet, and the confidence of quality institutional support from respected value investors like James Barrow (27.8 million shares) and John Houseman (1.75 million shares). The mean analyst rating for T is a lukewarm 2.3. I think, unless dividends and safety are your only two criteria that better options exist in the telecommunications sector. If stability, safety and income are your only criteria, AT&T may well be for you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.