AT&T: Why 5G Is Absolutely Critical

| About: AT&T Inc. (T)

Summary

I chose a dividend champion in selecting AT&T as one of my core positions, but it's becoming a growth stock thanks to its unprecedented innovation.

I discuss progress being made in the 5G development process.

I discuss why 5G is at the center of AT&T's plans.

I chose a dividend champion in selecting AT&T (NYSE:T) as one of my core positions. I will reiterate once again that I tend to keep 20-25% of my portfolio in high yield, which I define as anything over 4%. This is because it can lead to a solid stream of income as well as dividend reinvestments that will compound and build wealth for future income. I am in the name for the dividend and recently depicted the incredible strength of the company's growing dividend payments over time. However, in the last few months, the name has looked more like a growth name, and I have discussed the company's recent push to innovate. This innovation has been unprecedented. Perhaps the best move that bodes well for growth is the company's unprecedented push to integrate its DirecTV content with mobile. As of this morning the stock is now above $40 per share. A year ago I would have thought this highly unlikely given the sideways action of the stock. Now the name is even in the running to buy Yahoo! (NASDAQ:YHOO), helping drive innovation and the share price higher. Crossing $40 is a milestone level, and several consecutive closes above $40 and $41 would lock in a continued bullish pattern. But I am looking at the long-term here, and while the Yahoo situation is interesting, this is still a telecommunications company.

As I have documented, AT&T is also fighting to be first on 5G technology. The company is investing hundreds of millions of dollars into its infrastructure. It seems almost weekly there is a headline that the company is pumping millions into a new area to make improvements. While the company still manages a "phone service," it has grown to be so much more. And the move to be first on 5G technology is a key competitive advantage. As such I would like to check in on the progress being made here.

I don't want to rehash the prior work I have covered on the 5G move, but there has been some exciting new developments. Just this week we learned that AT&T is now partnering with Nokia (NYSE:NOK) to expand its 5G lab trial work. Nokia is helping the company test millimeter wave, which will be a key component of 5G deployment. You may recall that I discussed the 5G trial AT&T is conducting in Austin, Texas. But now there is work being done in other areas. AT&T has started both system and software architecture lab work in Middletown, New Jersey; Atlanta, Georgia and San Ramon, California. That is three more sites for this exciting work. As we know, a larger and faster 5G network is a key competitive advantage. The goal of these trials is to identify the best path for a cost-effective wireless experience that incorporates software-defined networking (SDN), data analytics, security and open source software to "quickly adapt to new consumer and business demands."

So how are the trials going? Well, the trials have achieved multi-gigabit speeds. In addition, the trials also simulate "real-world environment scenarios and strenuous conditions." These include such stressors as varying increased amounts of data transmission at a given time. This might replicate what a group of customers might see at a large festival or sports game. These trials allow AT&T to test and fine tune signal performance, reliability, range and coverage. Early latency performance tests have been successful. 5G multi-gigabit speeds and very low latency will enable communication with multiple devices at once.

Looking ahead, by the end of summer 2016, AT&T expects to conduct outdoor 5G wireless connectivity trials to fixed locations in several cities where its lab trials are ongoing. What I think is important to note is that the AT&T 5G trials are being conducted in such a way that the work can contribute to the international 5G standards development. This is something I covered several months ago when I reported on the move to 5G and AT&T insisting on being first here. Commercial use will occur after standards are developed and right now it seems likely that the first phase of standards-setting process will be done in 2018.

Tom Keathley, Senior VP of AT&T in the wireless network and design segment stated:

"In short, these tests will help set our strategy for future deployment in urban and rural areas to deliver multi-gigabit wireless speeds 10-100 times faster than today's average 4G LTE wireless connections. We've seen great results in our 5G lab trials, including reaching speeds above 10 gigabits per second in early tests with Ericsson. Nokia is joining to help us test millimeter wave, which we expect to play a key role in 5G development and deployment. The work coming out of AT&T Labs will pave the way toward future international 5G standards and allow us to deliver these fast 5G speeds and network performance across the U.S."

The bottom line here? The innovation continues. I think with everything the company is involved in, including the Yahoo acquisition, the Hello Lab social media push, the integration of DirecTV premium video services to owners of any device and over any network, the infrastructure of the company becomes critical. As such, my thesis is playing out. The move to 5G is critical to the longer-term goals of the company. It needs the speed of the network to match its lofty innovation goals. This is a long-term game and one that is moving AT&T away from a boring dividend company to a growth company.

As always, I welcome and encourage your thoughts below.

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Disclosure: I am/we are long T.

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.