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AT&T, Inc. (T) shares have broken out to new highs after a seemingly impressive second quarter. The key driver is the 10% year over year earnings per share growth. AT&T reported 66 cents earnings per share versus the 2011's 2nd quarter earnings of 60 cents per share. The stock performance has truly been impressive. My focus is to determine if the new smartphones are turning AT&T into a growth story. The current dividend yield is 4.7% after a 2012 25.8% common stock price increase. I believe the current valuation is inappropriate and long term holders are over paying for AT&T shares due to a lack of revenue growth.

An income investing strategy should focus upon corporate revenue growth, earnings growth, and dividend growth. All 3 elements will eventually show up in the annual returns for an income investing strategy. AT&T lacks any meaningful revenue growth.

T Total Return Price Chart

T Total Return Price data by YCharts

Business Model

AT&T is clearly a beneficiary of the dramatic growth in computing power. The tablet, smartphone, and internet connectivity are all changing at a rapid pace.

.25% Revenue Growth

The quarterly revenue growth has remained flat since September 30, 2010. Per the below AT&T chart, AT&T's total revenue last quarter was $31.58 billion. This is only .25% (25 basis points) higher than the year over year revenue number of $31.50 billion. This is tepid growth at best.

The total operating revenues are flat when looking at the corporate numbers. The above numbers are not a sign of strength. They appear to be a sign of weakness. It is stunning to see a flat revenue growth based upon the Google (GOOG) Droid operating system and Apple (AAPL) within smartphones, tablet innovations, and 4G producer offerings introductions into the consumer and corporate markets.

Return on Equity

AT&T's return on equity was 4.29% for the past 4 quarters. This paled in comparison to a 17.26% return on equity for the corresponding year over year 4 quarters.

7.07% Quarterly Cash Flow Growth

On a positive note, AT&T increased its quarterly cash flow by 7.07% to $9.66 billion. The 2011 2nd quarterly cash flow was $9.02 billion.

Verizon (VZ) versus AT&T

Verizon's revenue growth has struggled along with AT&T's.

VZ Total Return Price Chart

VZ Total Return Price data by YCharts

Verizon has total 2nd quarter revenue of $28.55 billion. This is 3.69% higher than 2011's 2nd quarter revenue of $27.54 billion.

T Revenue Growth Chart

T Revenue Growth data by YCharts

15 Year Verizon Return

Verizon has similar 15 year returns to its leading competitor, AT&T. A 2.8% total annualized rate of return, in my opinion, is not impressive. A 1998 annual dividend of $1.54 increased modestly to $1.96 per share over the course of 15 years. Investors need revenue growth, earnings growth, and dividend growth. All 3 go hand in hand.

Vodafone Group Public Limited Company (VOD) has confirmed it will receive a $4.5 billion dividend from Verizon Wireless. Vodafone owns a 45% share in Verizon Wireless in the U.S.

15 Year AT&T Return

AT&T did beat Verizon's 15 year total annualized rate of return by .1% per year. Both companies did not beat the SP500 annual return, in comparison, of 3.8% over the same time period.


AT&T has rewarded shareholders with an impressive performance through present date. AT&T is a proxy for the bond market. A 10 Year Treasury Bond yields 1.58%. AT&T's 4.7% dividend yield beats the 10 Year Bond by 312 basis points.

If revenue growth is the engine for future profits, then AT&T's earnings growth appears to be backed by share buybacks versus organic revenue growth. In the 2nd quarter, AT&T bought back $2.5 billion in stock buybacks. These reduced 75.8 million AT&T shares from the total outstanding shares.

A company without revenue growth will eventually decline. Margin expansion, earnings per share, and shareholders will be rewarded if revenue growth creates an increase in earnings per share.

Reviewing the SEC 10Q filings, the revenues and earnings growth do not support purchasing AT&T shares for a 4.7% dividend yield. Revenue growth is the bread and butter to future earnings per share growth. AT&T legacy business lines and current business model are generating a flat revenue growth trajectory.

Disclosure: I am long AAPL.