Why AT&T Is Awesome For Income, But Not Much Else

Jan. 7.12 | About: AT&T Inc. (T)

AT&T (NYSE:T) has been a solid and steady performer and is now approaching 52-week highs. However, from a first look at the stock, it seems like it is trading at about fair value. Here are the seven points I looked at to make an assessment of the stock:

Valuation: AT&T’s 5-year trailing valuation metrics suggest that the stock is fairly valued. AT&T’s current P/S ratio is 1.4 and it has averaged 1.6 over the past 5 years, with a low of 1.2 and a high of 3.2. AT&T’s P/B ratio is 1.6 and it has averaged 1.7 over the past 5 years with a high of 2.3 and a low of 1.4. AT&T’s P/E ratio is 15.4 and the 5-year high is 22.0 and low is 8.0. The AT&T, T-Mobile joint venture could be mildly accreditive to AT&T earnings.

Price Target: The consensus price target for the analysts who follow AT&T is $31.5. That is upside of just 4% from AT&T’s current stock price. That is very limited upside.

Forward Valuation: Analysts project AT&T to earn $2.45 per share in 2012. The stock’s current price is $30.50, which leads to a forward multiple of 12.5. For a company that is projected to grow slower than the economy, that may be a bit high. Revenues are projected to grow 1.3%. The closest comps are Sprint (NYSE:S) and Verizon (NYSE:VZ). Sprint is not profitable, so the P/E comparison is useless. Verizon is trading at a forward P/E multiple of 15.6. Revenues are projected to grow 4.1%.

EV/EBITDA: Since Sprint is not profitable, a better comparable valuation metric is EV/EBITDA as it takes out the effect of interest and depreciation expenses on earnings. On that basis, Sprint is trading for 3.8 times trailing twelve month EBITDA. AT&T is trading for 6.2 times trailing twelve month EBITDA. Verizon is trading for 3.8 times trailing twelve month EBITDA. EV/EBITDA suggests that AT&T is trading at a premium multiple.

Free Cash Flow: AT&T has been busy repaying its debts and paying a dividend to shareholders with its free cash flow. AT&T has paid out more than $9 billion in dividends each of the past three fully reported fiscal years and repaid a total of $10 billion of debt in 2009 and 2010.

AT&T has a strong history of dividends. It has paid a dividend since 1984 and it has nearly quadrupled over the past 28 years to quarterly payout of 43 cents per share. The stock is currently yielding a whopping 5.8%.

Earnings Estimates: In the past 4 quarters, AT&T has beat EPS estimates by a penny twice and met EPS estimates twice.

Price Action: AT&T has been doing well and it is now trading at $30.51, just short of 52-week highs. However, there seems to be strong resistance in the $31 area as it tried to penetrate the price level in July and failed. The sentiment in the stock seems positive as it is well above its 50 day moving average and has had a strong rally of 6% since mid-December.

Click to enlarge:

Click to enlarge

Conclusion: For an income investor, AT&T may make sense. However, the stock is trading at fair multiples and at a significant premium on an EV/EBITDA basis to Verizon. The upside in share appreciation is probably limited at these price levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.