Warning Signs: Avoid This Telecom Giant

| About: AT&T Inc. (T)

AT&T (NYSE:T) is a communications giant with a powerful array of network resources that include the nation's largest 4G network. Although the company recently declared a quarterly dividend of $0.44 a share, its shareholders have had it pretty rough over the past few years. If revenue is not falling, Verizon (NYSE:VZ) is having a shot at AT&T's customers. One of the recent disappointments was the inability of AT&T to acquire T-Mobile for $39 billion. Apparently, legions of opponents lined up against the deal.

Analysts at Macquarie predict AT&T's free cash will decline 2.9% in 2013 and 1.1% in 2014. Rival Verizon looks better positioned. A higher-than-normal dividend raise isn't likely this year, but analysts say Verizon's shareholders could see a one-time 10% increase in the dividend in 2013 or 2014, while its free cash is expected to climb 29% in 2013 and 14% in 2014. Investors tend to prefer reliable, rising dividends to AT&T's buybacks, which could work in Verizon's favor.

With its shares so shaky, the future does not look very bright for AT&T. Since the iPhone made its debut in 2007, AT&T's revenue rose and the number of subscribers increased. But a few years later, Verizon and Sprint (NYSE:S) have had a shot at its customers. Verizon took away quite a sizable number of them. And it has coped more effectively with the headaches associated with the iPhone. Regular AT&T customers still complain about how the bandwidth-hungry device overwhelms the network, leaving them unable to make calls -- even though AT&T has spent over $37 billion since the iPhone launch on new equipment and capacity.

Worse yet, AT&T has problems with its fixed-line unit. Its high-speed, fixed-line broadband network hasn't been able to tackle the challenge. AT&T has also used its fiber-optic-based network to supply TV services, but it hasn't enabled it to outshine Verizon and Comcast (NASDAQ:CMCSA).

AT&T management aims to dominate the mobile phone market. But while it struggles to pick its way back from customer outcry, one of its rivals, Sprint, is in the headlines as it tries to straighten out its network. It recently announced that it is selling a controlling stake of 70% to Japan's Softbank for $20 billion. The biggest ever acquisition by a Japanese firm, Sprint could become a stronger competitor to AT&T and Verizon if the deal is successful. It will also provide the third-largest U.S. wireless carrier with an immediate infusion of cash.

Also, Sprint is setting up its 4G-LTE network in AT&T's key metro markets like Atlanta (AT&T Mobility's HQ), Dallas (AT&T's HQ), San Antonio (Southwestern Bell's former HQ), and now Chicago (Ameritech's former HQ). I believe that AT&T knows that Sprint is taking the fight to AT&T's stomping grounds.

In addition to all this, AT&T has a revenue problem. Voice and messaging revenues are falling due to the popularity of free, over-the-top (OTT) services. Data usage has gone through the roof, and prices per bit are either flat or dropping as well. That has forced AT&T to put billions into network upgrades in order to remain competitive. To make matters worse, consumers don't care about the challenges that AT&T faces. I think the reason is because they've been paying through the nose for years, and believe the wireless giant can do a better job of communicating with them.

I know that AT&T will continue to play a leading role in the wireless sector. It holds a steady 105.2 million subscribers, while Verizon sits comfortably with 94 million. Sprint has 54 million subscribers to appease. AT&T subscribers and affiliates are the providers of AT&T service in the United States and around the world. As a leader in the mobile Internet sector, it is an important provider of wireless, Wi-Fi, and voice- and cloud-based services. I also know that its suite of IP-based business communication services is one of the most advanced in the world.

Over the past 28 years, AT&T has steadily increased its dividends and supplements capital return with stock buybacks -- something Verizon hasn't done since 2008. It trades at 14.2 times forward earning estimates, compared with 16.4 times for Verizon's stock. It became the first mobile operator to scrap its all-inclusive data plan for smartphones, a move that pleased shareholders. And its exclusive contract with Apple (NASDAQ:AAPL) is still increasing the network's revenue, the number of subscribers, and profits.

The problem is that this is not just enough to satisfy many watchers of the company. Its price-to-earning ratio is 48.09, compared with Verizon's 45.37, while the industry average is 37.38. Although its price-to-sales ratio is 1.63, it compares unfavorably with the industry average of 1.13. The price-to-sales ratio of Sprint at 0.50 and Verizon at 1.15 are lower. Unlike Verizon, AT&T lacks a debt-free balance sheet, which means it can't free up cash as easily as its competitors.

There are networks that, year after year, show concern for growth and customer retention. Some wireless carriers like T-Mobile fit that bill. Others, like AT&T, do not show as much concern, which is one of the reasons why I won't be buying this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.