Don't Hang Up On AT&T, The Stock Has Room To Grow

| About: AT&T Inc. (T)
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The purpose of this article is to discuss AT&T (T) and its attractiveness as an investment option. I will attempt to determine if it makes sense for investors to initiate new long positions at the current market price.

First, a little about T. T is a holding company and is a provider of telecommunications services in the United States and worldwide. Services offered include wireless communications, local exchange services and long-distance services and its three largest segments are wireless, wireline, and advertising solutions. The stock is currently trading at $37.38/share. It has a quarterly dividend of $.45/share which translates to an annual yield of 4.81%. T has a reliable history of paying its dividend; the company did not decrease its payout during the recession and has raised the paid amount consistently since 2006. The stock also has a beta of .55, indicating the stock is much less volatile than the market as a whole. This stock hits a lot of my criteria right off the bat. It has a high yield, a commitment to increasing that yield, and trades with low volatility. This is solid criteria for dividend-seeking investors.

Recently, the stock has performed strongly. Year-to-date T is up almost 11% and over the past 52 weeks the stock is up close to 13%. Both of these figures exclude dividends. With such a solid performance, I want to dig in to T's recent financial statements to determine if the stock still has room to move.

To start with, I feel that T is in a growing field and investors should have exposure to telecommunications. While I naturally lean towards this sector because of its stable cash flows and historically high dividends, I also feel this is a growth story. As more consumers around the globe buy cell phones, upgrade them, connect to the web, and just in general increase their reliance on technology, stocks in this industry will continue to do well. The U.S. market is far from saturated in the smartphone market, and emerging markets also represent an enormous opportunity in this area. With an increasingly wireless world, and T being a global player, I see a lot of potential for this stock.

I examined T's 2012 annual report and their most recent quarterly filing from April. One thing that stood out right away was that T saw a large increase in operating costs in 2012, up 52% from 2011. It is worth noting that in 2013, so far, the costs are right in line with 2011, so T has reversed this steep trend. The reason for this large increase is that T invested over $20 billion to expand and upgrade its network capabilities for U.S., and global, consumers. In the U.S. alone, T more than doubled the population that would be covered by its 4G network. The investment seems to have paid off: In 2012 overall revenues increased to over $127 billion, the highest in T's history. Additionally, T posted its largest annual increase in total broadband subscribers, and its total wireless base also grew. This is encouraging since the company made a massive investment specifically to increase its subscriber base.

When comparing the 1st quarter results of 2013 to the 4th quarter results of 2012, the trends are also encouraging. Net income increased by over 3% and the amount set aside for uncollectible accounts decreased by 20%. This could be due to factors such as an improving economy, a tightening of T's standards on who can pay on account, but is most likely a combination of both and other factors. One source of concern could be that operating revenues are down 2.5%. However, even with this decline, revenues from the data segment are up 4.5%. In my mind, data is the largest growing segment and has more potential over its other segments of voice/text and equipment. Seeing an increase in data revenues is very encouraging to me and, if that trend continues through 2013, T's stock will definitely benefit.

Some risks to T include increased competition from players such as Verizon (NYSE:VZ) and Sprint Nextel (NYSE:S), an increasing regulatory environment in both the U.S. and other countries, and slower adoption rates of smartphones and data technology in other countries. Verizon has currently outperformed T, in terms of stock price, over the past year and is the world's leading communications provider. However, given VZ's impressive run, its dividend yield has come down to under 4% and its PE ratio is 5 times that of T. While I normally like investing in the market leader, given that T is trading at a much more attractive valuation, I would consider it at this time. That being said, I think both are good investments and I am satisfied with either to get some exposure to the communications industry.

Bottom line: T has performed strongly over the past 52 weeks and with 1st quarter results that put the company on track to beat last year's performance, T should continue to perform strongly in 2013. Coupled with the fact that T has a low beta and high dividend yield, T can provide investors both income and safety. T operates in a growing industry and its capital investments in 2012 have paid off in terms of revenue and subscriber growth. For those who do not like to purchase individual stocks, T is also a component of the SPDR S&P Dividend (NYSEARCA:SDY) ETF which tracks the highest-yielding companies in the S&P 500 that have never decreased their dividends over the past 25 years. SDY is a favorite ETF of mine and one which I have written a few articles about. This fund would give investors exposure to T, while also helping to keep them diversified. Either way, adding T to your portfolio is a relatively safe and, potentially, very profitable play.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in T, SDY over 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.