If you took a look at a screenshot for AT&T(T), you might think that this whole "flight to safety" thing has gotten carried away. In the past couple months, many stock screens have shown AT&T exhibiting a P/E ratio of 50-150x earnings. These figures do not reflect AT&T's normalized earnings.
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The $0.75 in earnings per share that you may see is largely due to the breakup fee following AT&T's failed bid of T-Mobile. Matt Krantz of USA Today sums it up well in one of his recent "Ask Matt" columns on the subject:
"When AT&T's bid for rival T-Mobile was snuffed out in 2011 on antitrust concerns, AT&T not only lost its prize but suffered a big hit financially. As part of the deal, AT&T had to pay a $4 billion breakup fee, a huge penalty for making a bid that didn't happen. It's one of the biggest breakup fees ever paid.
There's no question the penalty is a huge hit. The company had a pile of $2.4 billion in cash plus $5.2 billion in long-term investments at the end of the first quarter of 2012. The $4 billion breakup fee is certainly a big black eye for the company, making the loss of the T-Mobile deal even more painful."
So what are AT&T's normalized earnings? According to Value Line, AT&T is slated to make $2.40 for fiscal year 2012. At today's share price of $37.56, AT&T's P/E ratio in relation to normalized earnings is 15.65. That's a much more down-to-earth number than 50x earnings. Considering that AT&T has traded at slightly over 14x earnings over the past decade, it's much easier to make a determination as to whether AT&T's earnings quality and growth prospects are substantial enough to warrant paying slightly above its past decade norm. It's always worthwhile to conduct due diligence before making any investment. But anytime I see a P/E ratio below 7 or above 30, the siren goes off to look for one-time events that could be skewing the earnings figures.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
