AT&T: Aggressive Efforts To Improve Subscriber Base Earn It A Bullish Rating

| About: AT&T Inc. (T)


AT&T leads the market with its solid subscriber base.

Leap acquisition and U-verse service expansion will help AT&T improve its operations and performance.

The stock offers an impressive dividend yield of 5.7%, along with a healthy balance sheet, which lowers the company’s risk profile.

AT&T (NYSE:T) is a market leader in the U.S. Telecom Sector and its fundamentals remain strong. The company is likely to benefit from growth investments in the near future, as it has been aggressively undertaking growth CAPEX, including Project VIP and LEAP acquisitions. The company offers an impressive and stable dividend yield of 5.70%. Also the company has been undertaking hefty share purchase plans, which are likely to portend well for its future earnings and stock price. Furthermore, the company's strong balance sheet, which supports its growth CAPEX, enhances its long term growth prospects.

Telecom Sector; a Battle Field to Get a Strong Subscriber Base
Competition in the Telecom Sector has been intense and companies are undertaking price wars to address this problem. Also, companies are working aggressively to improve margins and strengthen their subscriber base. In a highly competitive business environment, T has been taking the right measures to strengthen its subscriber base. Wireless being T's core focus now covers 90% of the U.S population. The company is rapidly expanding its advanced 4G network, which is expected to be completed by next summer. The company has solid wireless operations and has been working to improve wireless margins, and is experiencing postpaid subscriber additions and is observing increases in ARPU. Moreover, the company's churn rate has been improving in recent quarters; in 4Q2013, the company's churn rate improved to 1.11%, as compared to 1.19% in 4Q2012. In a highly competitive environment, T has maintained its strong subscriber base, and I believe its growth measures will further strengthen its operations and subscribers.

The following chart shows T's postpaid subscriber net additions for the recent four quarters.

Source: Company's quarterly earnings report

The following chart shows the improving ARPU trend in recent quarters.

Source: Company's quarterly earnings

Despite tough competition and intense price wars in the industry, T has maintained healthy gross postpaid additions in recent quarters. As shown in the table below, T's share of gross postpaid additions in recent quarters is better than Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS), however, it lags behind Verizon (NYSE:VZ). The following table shows the share of T's gross postpaid additions during the four quarters of 2013, in comparison to its peers.

1Q 2013

2Q 2013

3Q 2013

4Q 2013





















U-verse to Support Revenue and Subscribers Growth
T's Project VIP is among the most striving network build out schemes thus far in the telecom industry; the program brought U-verse technology to enhance its IP-based wireline network. This 3-year project will improve T's bottom line results in the near future. The company has been making constructive progress in the expansion and implementation of Project VIP, which is evident by U-verse total subscribers and revenue growth in recent quarters, as shown below.

Source: Investors Presentation

Leap Wireless Acquisition = Growth
T recently acquired LEAP for $1.2 billion after acquiring FCC approval. The deal includes the acquisition of spectrum in PCS and AWS band, and 5 million subscribers of LEAP. The spectrums acquired from LEAP are compatible with T's current network and will immediately be put to use, which will help the company improve its service quality and network capacity. I believe this acquisition will help the company effectively penetrate the no-contract segment at low cost, offer simple plans and improve network service quality.

Investor Friendly Dividend & Share Buybacks Backed by FCF
T has been sharing success with shareholders through dividends and share buybacks. The company offers a dividend yield of 5.70%, which is 110bps higher than VZ's dividend yield of 4.6%.

Due to the impressive dividend yield, the stock remains attractive for dividend investors. T has been consistently increasing its dividend in the recent past. In 2013, the company increased its dividend by 2.2%; the quarterly dividend increased from 0.45 cents to 0.46 cents per share. The recent dividend increase marked the telecom giant's 30th consecutive year of a dividend hike.

As per the company's guidance; 2014 FCF are expected to be $11 billion. Based on the FCF guidance of $11 billion and current annual dividends of $9.7 billion, the dividend payout ratio is expected to be 88% in 2014. I believe T's cash flows are expected to remain slightly pressurized in the near term due to its growth CAPEX; however, cash flows will stabilize in the medium to long term as growth CAPEX will slow down.

Along with its attractive dividend yield, the company has been undertaking aggressive share buybacks to support its earnings growth. The company repurchased 366 million shares in 2013 worth $13 billion, representing 7.6% of its current market cap. The company does not have any specified share repurchase plans for the near future; however, T indicated that share repurchases in future will depend on market conditions and available opportunities.

Strong Balance Sheet & Upside Stock Price Potential
The company has a strong balance sheet, which supports its growth CAPEX and strengthens its credit outlook. The company has a debt-to-equity ratio of 0.76x, better than the industry average of 1.30x. Also, the company has strong interest coverage of 8.0x, higher than the industry average of 5.5x. Its low debt-to-equity and higher interest coverage indicate a healthy credit outlook and improve the company's risk profile.

Debt to Equity

Interest Coverage
















Source: Morningstar and Wikinvest

Price Target

I have calculated a stock price target of $38 for T, using free cash flow discounting. For my price target calculation, I used estimated free cash flows from 2015 to 2017, cost of equity of 7.6%, after tax cost of debt of 2.9%, debt-to-equity of 30%, terminal growth rate of 1% and WACC 6.2%. Based on price target, the stock offers a potential price appreciation of 15%.




Terminal Value

Estimated Free Cash flows [FCF] ($-Millions)





Present Value of FCF ($-Millions)





Source: Equity Watch Estimates and Calculations

Total Value of Firm= 10,970 + 12,083 + 12,279 + 238,236

= $273,595

Total Value of Debt= $75,310 million

Total value of equity= Total Value of firm - Total value of Debt

Total value of equity =$273,595 - $75,310

Total value of equity = 198,285

Shares outstanding=5,210 million

Price Target= Total value of equity/ Shares outstanding



T is currently leading the market with its solid subscriber base. The company has been taking aggressive initiatives to retain and strengthen its subscriber base. The Leap acquisition and U-verse service expansion will help the company improve its operations and performance. Also, the stock remains an attractive investment option for dividend-seeking investors, as the stock offers an impressive dividend yield of 5.7%. Furthermore, a healthy balance sheet lowers the company's risk profile. Furthermore, the stock offers a potential price appreciation of 15%, based on my price target of $38. Due to the above mentioned factors, I am bullish on the 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.

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