AT&T (T) is one of the most reliable companies out there. From the ashes of the old "baby bell" system, AT&T has emerged as a leader in wireline, wireless, and internet platforms. AT&T's nearly $200 billion market capitalization dwarfs all competitors. The company is also a dividend champion, having raised dividends 27 years in a row.
In the first quarter of 2012, AT&T's management team was able to take its eye off the frustrating failed bid for T-Mobile, and get back to running its business. The repercussions of that failure were a management shake up and a cut in AT&T CEO Stephenson's pay. The company also paid $4.2 billion in charges and fees relating to the failed bid.
AT&T had an average first quarter performance. Revenue came to $31.8 billion, showing a 2% increase from the same quarter in 2011. Earnings came in at $3.58 billion, or $0.60 per share, a gain of 5% from the same quarter last year, which beat analysts' expectations of $0.57 for the quarter. Between the dividend and a share repurchase program, $4.7 was returned to shareholders. I never like seeing this figure higher than earnings, and hope that some sanity occurs during the balance of the year in terms of moderating the share repurchase activity.
There were a number of positive financial signs during the first quarter. Wireless data, most of which is the form of bundled plans, increased by $1 billion over the 2011 first quarter, to $6.1 billion, which helped to offset wireless voice revenues that fell about $650 million from the first quarter of 2011. Smartphone sales reached a record 5.5 million units. The churn rate was a historically low 1.1%, and over the course of the quarter, the company added over 700,000 customers. Wireline revenue was up by nearly 2% to $1.8 billion, the seventh consecutive quarter of increased revenues in that business niche. And AT&T "U-Verse" television and internet protocol revenues jumped up nearly 40% over the year ago quarter. The new Lumia 900 phone from partner Nokia (NOK) boosted sales in the first quarter, and will do so again in the second quarter.
If there is a real problem with AT&T, it is that its network does not compare with archrival Verizon's (VZ). Over the past two years, AT&T has focused on its 4G network, whereas Verizon has focused on its much faster 4G Long Term Evolution, or LTE network. It will take years and many billions of dollars for AT&T to catch up, and by that time, there will likely be a 5G network to build out.
The other current issue facing the company is the very reason for its stubbornness in pursuing the T-Mobile deal, which is the need to acquire additional radio spectrum. Many studies have shown that AT&T customers are generally the least satisfied among all major carriers. Anecdotally, I note that I have happily had AT&T wireless for many years. Frankly, thanks to our friends in Washington D.C., this has become a total mess. Lightsquared's plan to acquire and then sell off spectrum was scuttled by the FCC and Sprint Nextel (S). There will be no federal auction of spectrum for at least a year. This leaves AT&T to either muddle through with inadequate spectrum in New York and San Francisco, or to buy spectrum by acquiring the likes of Leap Wireless (LEAP). Neither of these options is ideal.
Analysts predict AT&T earnings will rise by 8% to 10% per year over the next five years, aided no doubt by continuing share buybacks. AT&T has plenty of long-term debt, but that amount is still less than 40% of capitalization, and therefore not terribly troubling. As the years pass, the new AT&T is looking more and more like the old AT&T. It is safe, secure, boasts a high yield of 5.4%, and is quite perfect for income seekers. But for growth potential, look elsewhere.
If Leap Wireless is not acquired by someone, soon, I do not see it remaining viable for long. Leap's bottom line in the first quarter was bad by anyone's standard, perhaps even Leap's own. It lost $98.4 million, or $1.28 per share in the first quarter of 2011. The company has not been profitable in the last five years. The company's principle operating asset is its Cricket Wireless brand, which exists solely as a prepaid service, usually in lower income, urban neighborhoods. The model has not worked, yet Leap clings stubbornly to it at its own detriment.
Leap has a market capitalization at its current depressed stock price of a little over $400 million. But its wireless spectrum rights alone are worth over $2 billion. Management believes the company has a future, and recently agreed to a swap of spectrum rights with T-Mobile. If Leap cannot really make a go if it as an ongoing business, it owes it to its shareholders not to burn through its $600 million cash on hand and remaining shareholders equity. The company should either try to sell itself, or auction off those valuable spectrum rights. I am pretty sure that either way, AT&T would be very interested. There is no way I would endorse anyone to purchase shares of Leap at the present time.