AT&T: Wake Me Up at $65

My great-grandfather worked for AT&T (T) nearly 100 years ago. I honestly do not know the exact details of his job (I have heard he was a janitor, though I am not sure). However, what I do know is that during his tenure, he made it a point to stuff as much AT&T stock under his mattress as he was allowed to. I suspect my recently deceased great aunt, who spent a nearly her entire career working for the phone company, did the same.

I have no clue how much that stock is worth today – and I have no idea how much of it still remains in family hands (I know some does). Specifically, I have no clue why my relative made it a point to acquire as many shares as possible. However, after reading yesterday's announcement, what I do know is that it imay be a good time to follow in the footsteps of my great-grandfather and make it a point to start socking away some more shares of AT&T.

Yesterday, AT&T announced it has raised its dividend 12.7%, indicating an annual dividend of $1.60. A $15B share repurchase program was also part of the announcement. The 400M shares that will be repurchased over the next 12 months represent 7% of the company's outstanding stock. This program is in addition to the $13B repurchase program announced in 2006. The stock is currently up 5% for the day and even with that huge one-day jump, the forward dividend yield is indicated at a little over 4%.

Of course, the above numbers are just a recap of what was announced in their press release. Let's look at two factors that will drive AT&T to new record highs over the next 24-36 months.

Expanding Product Line Fit for Survival

This may be a bit apocalyptic, but the traditional phone companies are dying. Frankly, there are only three big ones left: AT&T, Verizon (VZ) and Qwest (Q). Additionally, the rumor is always floating around that Verizon and Qwest will team up at some point. A handful of smaller bells and phone companies remain, but most are struggling. Wireless has been a saving grace, but the bread and butter of these LECs, the traditional phone line, is on the way out. Some industry visionaries have even forecasted the phone companies being eliminated entirely within the next 25 years as they give way to the cable companies and other independent operators. AT&T, however, will not go down without a fight. Part of the announcement was the roll out of the U-Verse entertainment/video service. In short, AT&T is moving towards becoming an entertainment company. The infrastructure they own is becoming worthless. However, if they can offer new services to deliver over the infrastructure they own, then AT&T can thrive. Former Ma Bell is now on the right track with its service offering. Sure, phone service will always be there, but look for AT&T to become a deliverer of content, entertainment, and experiences to its customer base. I have even participated in a handful of recent research studies about AT&T where it is clear that this giant will be making a push to become known as an entertainment services company and not just a telecommunications provider.

Lots of Gas in the Tank

AT&T is certainly tied to the performance of the stock market. The company is so large and is deeply rooted to the overall health of the economy. Like GE, AT&T is a bellwether stock. As the markets go, so does AT&T. However, the past seven years, this has not quite been the case. Even after yesterday's 5% jump, AT&T is still $20 per share off from its all-time highs set back in early 2000 and 2001. The stock is already up 100% from its 2003 lows, but still has some catching up to do. The past five years have seen AT&T finally catch the Dow Jones in terms of return on investment. While some are saying the Dow may be running out of steam, AT&T is just getting started and is in position to outperform the averages over the next two to three years. Similar situation as Merck & Co., Inc. (MRK) – lots of room to run and not a lot of problems in front of them.

Disclosure: Author has a long position in T

Comments

[Tom B:]

I'm long on T for the next 5 years or so:
1) iPhone exclusive (though their advertising seems to still focus on "moving" their cheapo phones)
2) Bigger (SBC/Ameritech acquisition)
3) New CEO
4) Bidding on 700 Mhz
5) Great dividend.

I like MRK too; looks like the VIOXX nonsense is mostly behind them.

2007 Dec 12 09:31 AM

[vboring:]

Free the Net, an ad-based wifi blanket spreading across San Fransisco will spell doom for most traditional information transmitters as customers move to VoIP enabled cells and P2P video software.

AT&T's new business model is as outdated as their copper infrastructure.

2007 Dec 12 11:09 AM

[Kawtrader:]

For AT&T to shift into entertainment successfully, it has to rebrand or get another outfit to do it for them. Joe Public/potential customers will always asosciate them with long distance telephony and not beat their path to its door in great numbers.

2007 Dec 13 12:54 AM

[martin stoffel:]

AT&T tried to become everything to everybody once b4 and look what happened ,when the CEO pulled the ripcord on his golden parachutt the stockholders ate it for years cleaning up all the companies that had been bought to "integrate" all the different ideas that technology hadn't arrived for yet. I bought AT&T b4 the breakup in '84(wasn't it), and hold everything I have recieved in spinoffs and reformations. While I don't think all the hairbrained directions will payoff PEOPLE ARE NOT GOING TO STOP TALKING!!! I think the GE comparison is applicable if you look at how GE has megasized itself into so many different lines of bizz.

2008 Apr 10 11:38 AM