AT&T: Substantial Total Return Opportunity Squarely On The Table

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About: AT&T Inc. (T), Includes: C, VZ
by: David Alton Clark
Summary

AT&T is down over 10% year-to-date and is trading just 5% off its 52 week lows.

There is good reason for the selloff based on a number of negative headwinds at present.

Nonetheless, I say this is the exact time investors should be buying, not selling.

In the following piece we make the case a substantial total return opportunity is onthe table for savvy dividend growth and income investors.

AT&T (NYSE: T) shares are down over 10% year-to-date and trading just 5% off their 52 week lows. Several negative headwinds and factors can be seen as the culprits for the selloff. The following are a few of the bearish catalysts.

Fierce competitive environment threatens profits

We just saw the first of what could be many top-line misses based on the fiercely competitive wireless market. This coupled with the fact AT&T is in the midst of major capital expenditures regarding its vast fifth generation network expansion efforts leaves little room for error.

What's more, it appears Verizon (NYSE:VZ) is not going so "quietly into the night" as it was believed. It seems Verizon has its designs on Disney (NYSE: DIS). So, even though AT&T is leading the competition regarding becoming the world’s premier Technology, Media, and Telecom (TMT) provider, it is in no way a lock. The company needs to keep executing to turn the stock around.

Debt level threatens dividend

In the company's 10-K, AT&T lists access to capital markets as a primary risk factor. The company states:

"Adverse economic and/or capital access changes in the markets served by us or in countries in which we have significant investments, including the impact on customer demand and our ability and our suppliers' ability to access financial markets at favorable rates and terms."

I consider this the biggest risk at present for the company based on the massive debt load. Moody's has given a Baa rating to new notes from AT&T, yet stated it's keeping the company ratings on review for downgrade. What's more, Moody's recently lowered its outlook on the entire telecom sector to negative from stable. On top of this, Moody's had already put AT&T on downgrade review in October after the company announced its $85 billion deal for Time Warner (NYSE: T). Moody's stated it will be monitoring to see if AT&T is willing and able to reduce leverage back toward a target of three times debt to equity. AT&T will need to hit a homerun regarding integrating DirecTV and Time Warner to do so.

Time Warner acquisition uncertainty

AT&T has basically bet the farm with the massive acquisition of Time Warner. If for some reason the deal does not pan out, AT&T will be in big trouble. Based on the current highly competitive environment, AT&T needs to create new diversified profit centers to keep paying and increasing that juicy dividend yielding 5.14% as of today. The Time Warner acquisition appears to be the answer to the company’s prayers. Nonetheless, the company will need to continue executing at a high level to keep things on track. Now let’s take a look at the brighter side of the story.

Dividend aristocrat status

AT&T recently declared a $0.49 per share quarterly dividend with a forward yield of 5.14%. The dividend is payable August 1st for shareholders of record on July 10th. The company has grown the dividend for the past 32 years.

Source: dividend.com

When I hear some stating the dividend is at risk based on the high debt load and competitive environment it makes me wonder how long they have been around. I have been involved in the markets since 1995 when I started working at Citicorp (NYSE: C). The fact that AT&T made it through the Dot Com bust and the 2008 housing debacle and subsequent “Great Recession” gives me plenty of peace of mind. I do not have any problem sleeping well at night holding my AT&T shares. What’s more, AT&T’s stock has an extremely low beta making it an excellent safe haven play.

Extremely low beta

AT&T's stock has an extremely low beta of 0.48. What this means is its stock is approximately half as volatile than the markets in general. This makes for an excellent safe haven play. AT&T's stock is a great place to park your money during times of market turmoil or uncertainty. All stocks rise and fall with the macro market tide, yet AT&T is much harder to budge.

Stock is undervalued

AT&T stock is trading just 5% off its 52-week lows. Nonetheless, the recent selloff has the stock trading at a bargain basement price. The company’s normalized P/E ratio stands at 13.6 while the industry and its peers are trading at 23.9 and 22.6 respectively.

Source: scottrade.com

Now, you must take into consideration AT&T is the 800 pound gorilla of the Telecom sector with a market capitalization of $235 billion. The sheer size of AT&T most likely accounts for a significant portion of the discount. It is much harder to move the needle either up or down on a behemoth such as this. Nevertheless, the company is making all the right moves to keep the profits rolling in.

Technical status

The stock has been in a downtrend for the last few months.

Source: finviz.com

Nevertheless, the shares have shown signs of life in recent weeks. You are never going to get a chance to buy a stock at a discounted price when the company is “firing on all cylinders” as many like to say. It is times like this that offer to best opportunity for solid total returns. On top of all this, the Fed just stated inflation appears to be under control in their most recent note out Wednesday. This should underpin the stock as well as the hunt for seemingly yield continues.

The Bottom Line

There are three things I want to see from an income stock in my portfolio; a solid, long-term growth story, safe and predictable cash flows, and a lengthy history of increasing dividend payouts. I would say AT&T has all the bases covered. I posit it's time to be greedy my friends with the stock sporting a 5.14 % yield, a 13.6 normalized P/E ratio, and trading just off its 52 week lows. The stock is oversold and unloved at present. Nevertheless, the stock is undervalued with substantial upside catalysts on the horizon.

The risk/reward equation currently favors long trades at this time in my book. It is definitely time to buy not sell. As always, layer into any position over time to reduce risk. Those are my thoughts on the matter. I look forward to reading yours.

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Disclosure: I am/we are long T. 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.