Telecommunications provider AT&T (NYSE:T) reported decent third quarter results Wednesday morning. Revenue was flat year-over-year at $31.5 billion, slightly shy of consensus estimates. Adjusted earnings per share grew 5% year-over-year to $0.62, which was a few pennies better than consensus expectations.
Highlights of the quarter included free cash flow, a record $6.5 billion, and share repurchases, which totaled $3.8 billion. Wireless revenues grew 6.5%, driven by ARPU growth of 2.4% as consumers flock to smartphones, particularly the iPhone (NASDAQ:AAPL) which accounted for 77% of smartphone activations (4.7 million units). Though smartphone activations were strong, net postpaid subscriber adds totaled just 151 thousand-well short of the consensus estimate calling for upward of 350 thousand and far behind Verizon's (NYSE:VZ) 1.5 million net new subscribers. AT&T mainly blamed Apple for having supply constraints for iPhone 5, thus limiting new subscriber growth. That's undoubtedly positive for Apple, though the lack of phones caused record Android (NASDAQ:GOOG) and Windows (NASDAQ:MSFT) phone activations.
We think the larger issue at play is Verizon's superior 4G LTE network and AT&T's shoddy reputation for customer service. Sprint (NYSE:S) is the only major carrier to differentiate on price, so we think AT&T's struggle to grow subscribers should be blamed on itself rather than Apple. If anything, Apple's responsible for the lion's share of the company's subscriber growth since the first iPhone was released. Nevertheless, the wireless business remains strong, with EBITDA margins of 40.8% and consumers flocking to expensive smartphones and data plans.
Even though third quarter results weren't particularly great, the company continues to generate tremendous amounts of cash and even bumped its full-year free cash flow guidance to at least $18 billion. Though subscriber growth was weak, industry fundamentals favor the big three-Verizon, AT&T, and Sprint-stealing share from smaller carriers with poor 4G LTE networks and no iPhones. We expect industry consolidation will bode well for pricing, but we fear consumers are becoming more focused on network connectivity, which will primarily benefit Verizon. AT&T currently sports a hefty annual dividend yield of 5.1%, but with shares trading near the top-end of our fair value range, we aren't interested in adding shares to our dividend growth portfolio at this time. AT&T's Valuentum Dividend Cushion score of 0.4 is not all that attractive as well.
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