Time To Consider AT&T

| About: AT&T Inc. (T)

Summary

In my view, AT&T should be included in every diversified large cap dividend stock portfolio. The company is generating strong free cash flow, and the dividend yield is high at 5.2%.

It has increased its annual dividend for 32 straight years. The company's free cash flow in 2015 was at $15.9 billion, while its paid dividends were at $10.2 billion.

The company delivered strong fourth-quarter results; it had double-digit growth in consolidated revenues, adjusted earnings, and free cash flow.

According to Portfolio123's "Momentum Value" ranking system, AT&T stock is ranked first among all S&P 500 stocks.

The average target price of the top analysts is at $40.50, up 9.1% from its February 8 close price; however, in my opinion, the shares could go much higher.

In my view, AT&T (NYSE:T) stock should be included in every diversified large cap dividend stock portfolio. The company is generating strong free cash flow, and the dividend yield is high at 5.2%. AT&T has increased its annual dividend for 32 straight years. The latest increase was announced in December, when the company boosted its quarterly payout by 2.1% to $0.48 a share. The company's free cash flow in 2015 was at $15.9 billion, while its paid dividends were at $10.2 billion, making the full-year free cash flow dividend payout ratio 64%.

Click to enlarge

Source: Fourth-Quarter 2015 Earnings Slide Presentation

Since the beginning of the year, AT&T stock is up 7.8%, while the S&P 500 Index has decreased 9.3% and the Nasdaq Composite Index has lost 14.5%. However, since the beginning of 2012, the stock has gained only 22.7%. In this period, the S&P 500 Index has increased 47.4% and the Nasdaq Composite Index has risen 64.4%. According to TipRanks, the average target price of the top analysts is at $40.50, up 9.1% from its February 8 close price; however, in my opinion, the shares could go much higher.

T Daily Chart

Click to enlarge

T Weekly Chart

Click to enlarge

Charts: TradeStation Group, Inc.

On January 26, the company reported its fourth-quarter 2015 financial results. The EPS of $0.63 was in line with expectations. Revenue increased 22% year over year to $42.1 billion, missing Street forecasts of $42.72 billion slightly. The increase in revenue was helped by the acquisition of satellite TV operator DirecTV. AT&T showed earnings per share surprise in its previous three quarters, as shown in the table below.

Click to enlarge

Data Source: Yahoo Finance

The company finished the year strong. It had double-digit growth in consolidated revenues, adjusted earnings, and free cash flow. At the same time, according to the company, it continues to see margin expansion in every segment of its domestic business.

Click to enlarge

Source: Fourth-Quarter 2015 Earnings Slide Presentation

In the report, Randall Stephenson, AT&T chairman and CEO, said:

We now have a unique set of capabilities that positions us for growth and also gives us a strategic advantage in providing consumers and businesses the integrated mobile, video and data solutions they want. Our DIRECTV integration is going well, and the customer response to our new integrated mobile and entertainment offers is strong. Throughout this year, we plan to launch a variety of new video entertainment packages that give customers even more choices. We're also seeing terrific results from our expansion into the Mexican mobile market. Our LTE network now covers 355 million people and businesses, and in the quarter we had 2.8 million wireless net additions.

AT&T provided long-term guidance following its acquisition of DirecTV, and there is no change to that guidance. Specifically, in 2016, the company expects:

  • Double-digit consolidated revenue growth
  • Adjusted EPS growth in the mid-single digit range or better
  • Stable consolidated margins with ramp in Mexico investment
  • Capital spending in the $22 billion range
  • Free cash flow growth with a dividend payout ratio in the 70s%

In my view, AT&T's synergy story with DirecTV remains intact. According to the company, it will see the merger synergy savings starting to show up in margins in 2016, and specifically, most of the $1.5 billion worth of run rate savings it expects to get to by the end of the year will start coming through the entertainment group. As the company goes through the year, it will see what happens with other competing interests, but apparently those items are leaving it with the expectation that it will have improving margins in the entertainment group.

AT&T expects video to become the biggest game changer for wireless over the next few years. As such, the company's network upgrade to LTE provides the platform for a larger wireless video offering. LTE also provides greater network efficiency; lower cost per megabyte of data, which lowers overall network expense. In January, the company launched a promotion providing unlimited data to wireless subscribers who currently have, or decide to add, AT&T's DirecTV or U-Verse service. Also, AT&T launched some integrated solutions for businesses, and according to the company, the best example of this is its Network On-Demand service, which lets customers dial their bandwidth up or down literally on demand. The common thread to all of this is providing its customers with a seamless integrated experience. Moreover, at the core of making all this happen is the network, and AT&T's LTE network now covers 355 million people and businesses in North America, and it expects to hit the 385 million mark by the end of this year.

In my opinion, the dramatic margin improvement in the business solutions segment is very encouraging. The EBITDA margins improved 360 basis points year over year, as cost efficiencies far outpaced equipment revenue declines. Equipment sales were down year over year, as the company sold fewer handsets and less wireline CPE to its business customers. However, higher-margin service revenues were essentially flat on a constant-currency basis, with growing strategic services and wireless services largely offsetting legacy wireline declines.

Click to enlarge

Source: Fourth-Quarter 2015 Earnings Slide Presentation

AT&T has been paying uninterrupted dividends since 1984. The company has increased its annual dividend for 32 straight years. The latest increase was announced in December, when the company boosted its quarterly payout by 2.1% to $0.48 a share. The forward annual dividend yield is high at 5.17% and the payout ratio is at 64.8%. The annual rate of dividend growth over the past three years was at 2.2%, over the past five years was at 2.2%, and over the past ten years was at 3.8%.

T Dividend Chart

T Dividend data by YCharts

Valuation

AT&T's valuation is pretty good. The trailing P/E is at 15.66 and the forward P/E is very low at 12.45. Furthermore, the Enterprise Value/EBITDA ratio is also very low at 7.43.

Ranking

According to Portfolio123's "Momentum Value" ranking system, AT&T stock is ranked first among all S&P 500 stocks, as shown in the table below (data as of the February 06 close).

Click to enlarge

The "Momentum Value" ranking system is quite complex, and it is taking into account many factors, like yield, price-to-book value, trailing P/E, price-to-sales, return on equity, sales growth, and relative strength, as shown in the Portfolio123 chart below.

Backtesting over sixteen years has proved that this ranking system is very useful; the reader can find the backtesting results of this ranking system in this article.

Summary

In my view, AT&T stock should be included in every diversified large cap dividend stock portfolio. The company is generating strong free cash flow, and the dividend yield is high at 5.2%. AT&T has increased its annual dividend for 32 straight years. The free cash flow in 2015 was at $15.9 billion, while its paid dividends were at $10.2 billion, making the full-year free cash flow-to-dividend payout ratio 64%. The company delivered strong fourth-quarter results; it had double-digit growth in consolidated revenues, adjusted earnings, and free cash flow. At the same time, it continues to see margin expansion in every segment of its domestic business. In my opinion, the dramatic margin improvement in the business solutions segment is very encouraging. EBITDA margins improved 360 basis points year over year, as cost efficiencies far outpaced equipment revenue declines. AT&T's valuation is pretty good; the forward P/E is very low at 12.45, and the Enterprise Value/EBITDA ratio is also very low at 7.43. Furthermore, according to Portfolio123's "Momentum Value" ranking system, AT&T stock is ranked first among all S&P 500 stocks. The average target price of the top analysts is at $40.50, up 9.1% from its February 8 close price; however, in my opinion, the shares could go much higher.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.