AT&T: A Strong Pick For Income In 2012

| About: AT&T Inc. (T)
This article is now exclusive for PRO subscribers.

by Larry Gellar

AT&T (T) has been in the midst of some high-stakes labor negotiations, but the latest news from Reuters suggests that the company may be able to avoid a strike for the time being. The 40,000 AT&T workers that the labor negotiations involve will continue working under their old contract, and this is an important step, as the company tries to get its workers to agree to reduced benefits, at least in the healthcare arena.

I'm reasonably optimistic about AT&T's ability to navigate the current labor situation. The stock's main advantage over its peers, such as Sprint-Nextel (S) and Verizon (VZ), is that AT&T's stock currently has a dividend yield of 5.7%. Sprint-Nextel doesn't offer dividends, while Verizon's dividend is nearly that of AT&T's, at a yield of 5.3%. Admittedly, the other important statistics are not in AT&T's favor. AT&T has a price to earnings ratio of 46.53, price/earnings to growth ratio of 1.69, and price to sales ratio of 1.46. All of Verizon's ratios are lower, with price to earnings at 44.31, price/earnings to growth at 1.22 and price to sales at 0.97. Verizon has better margins too - gross margin for the company is 58.63% and operating margin is 16.99%, while AT&T's numbers are 54.73% and 12.87% respectively.

Clearly, the decision between buying AT&T and Verizon comes down to how much one values the dividends. With that in mind, I will now lay out the argument behind buying AT&T, although it is entirely possible that Verizon will have better price appreciation going forward.

As mentioned before, the big story for AT&T has been its labor negotiations, and making those even more contentious are that the workers involved are wireline employees that frankly are not as valuable as their wireless counterparts. Regardless, other headlines have recently come out that could affect this company, and one important one is that AT&T will now allow out-of-contract users to unlock their iPhones. Although this news won't affect the vast majority of users, it is certainly a big step towards gaining the trust of those who frequently go abroad. In the past, AT&T's iPhones were worthless outside the United States unless users installed special (non-AT&T) software that "jailbroke" the phone.

Other wireless news comes in the form of the Nokia Lumia 900. Nokia's high-end smartphone has finally made its way to the United States, and this piece of hardware represents the first LTE Windows Phone on the market. At $99.99, the phone is cheaper than both the iPhone 4S and the iPhone 4, and it could appeal to the wise consumer that's looking for an iPhone alternative. The Lumia 900 has gotten pretty strong reviews so far, and I would certainly consider this phone to be a testament to AT&T's strong overall lineup.

Of course, AT&T has a variety of other businesses besides its wireless segment, and the company's work as a Managed Security Service Provider is gaining traction. Forrester Research has named the company a leader in this field, and AT&T scored well in a number of criteria. These criteria came under the categories of strength of current offering, strength of MSS strategy, and market presence, all of which are clearly important for a managed security service provider. Here's what Bill O'Hern, VP for AT&T Labs and Product Development, had to say:

We are pleased that Forrester has recognized AT&T as having one of the largest customer bases in the region ...and our focus on threat detection backed by a strong network infrastructure and an aggressive threat intelligence program as key differentiators in the market.

Another big part of AT&T's strategy going forward is to actually invest in startups. While companies like Intel (INTC) and Pfizer (PFE) have been doing this for years, AT&T has relied more on subsidiaries like Bell Laboratories for innovation. Times are changing, though, and the company recognizes that startups may be able to fill needs in mobile software and hardware that AT&T currently doesn't. With that in mind, AT&T has embarked on a "speed dating" process where companies get twenty minutes to make a sales pitch with AT&T. Other companies like Verizon and Deutsche Telekom (OTCQX:DTEGY) have similar processes for finding good startups, so AT&T's procedure isn't completely unique but still a step in the right direction in my opinion.

I'm also encouraged by the some of the news that's come out in the arena of wireless spectrum. One major reason why AT&T wanted to acquire T-Mobile USA was to add new spectrum that it could use for its data-hungry customers, although obviously the antitrust issues outweighed that in the government's eyes. It now appears that the U.S. government may be willing to share some of its spectrum with commercial enterprises such as AT&T. A recent proposal would allow companies like AT&T to have access another 95 megahertz of spectrum, which is definitely good news. As Lawrence Strickling of the National Telecommunications and Information Administration put it:

It is increasingly difficult to find desirable spectrum that can be vacated by federal users as well as spectrum in which to relocate these federal operations.

Besides the positive news stories discussed above, AT&T's statement of cash flows also looks pretty good right now. The company experienced a net change in cash of $1.748 billion during 2011, and the operating cash inflow of $34.648 billion played a huge role in that. In my opinion, AT&T is a great choice for retirees looking for additional income via dividends. Not only is the company financially strong, but there is also some terrific innovation happening right now that should lead to further increases in revenue. While AT&T's wireless segment is clearly in great condition, the company also has other lines of work like network security that are enormously valuable.

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