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Dow 30 Earnings: AT&T - Fourth Quarter 2011
AT&T (T –Free AT&T Stock Report), one of the world's largest telecom holding companies, having recently dropped its controversial bid to acquire T-Mobile USA from Deutsche Telekom (DTEGY), has posted somewhat disappointing fourth-quarter results. In fact, share net of $0.42 came in a dime shy of our estimate, due to greater-than-expected subsidies for popular smartphones, most notably Apple's (AAPL) latest, the iPhone 4S. (There were 7.6 million iPhone activations during the period.) The higher customer-acquisition costs pressured wireless margins, together with soft postpaid ARPU (average revenue per user) metrics and increased staffing/marketing expenses.
Nonetheless, the Dow-30 component's shares did not lose much ground following the earnings announcement (around 2%), and we think that there is plenty for investors to be encouraged about at this point. Though momentum in the smartphone space has proved costly for AT&T and its chief rival, Verizon (VZ – Free Verizon Stock Report), growth in the handset category should ultimately garner big financial benefits for these carriers, as subsidies decline and data usage continues to surge.
Moreover, the traditional wireline segment, while suffering from persistent access-line erosion, remains a cash cow, thanks to past restructuring efforts and acquisition-related economies of scale, and to favorable broadband and U-verse trends. (U-verse is AT&T's new video service.) This should ease the company's pain of having to pay Deutsche Telekom a $4 billion breakup fee, including $3 billion in cash, for the failed T-Mobile deal. And the strong cash flow ought to enable AT&T to pursue additional wireless spectrum, maintain its generous dividend policy, and get more active on the stock-buyback front.
To this end, the company has announced that it will resume repurchases of its common stock, which had been on hold during the T-Mobile negotiations. (A 300 million-share buyback authorization is already in place.) This will probably lend support to this issue, along with the roughly 6% yield here.
Despite the lackluster fourth-quarter performance, we are keeping our 2012 share-net call at $2.55, as we believe that wireless margins will bounce back fairly quickly. We also continue to like these shares for conservative investors seeking good risk-adjusted returns to mid-decade. Indeed, we still believe that this high-quality stock would make a fine addition to most diversified portfolios.
About The Company: AT&T, formerly SBC Communications, is one of the world’s largest telecom holding companies and is the largest in the United States. Its traditional (SBC only) wireline subsidiaries provide services in 13 states, including California, Texas, Illinois, Michigan, Ohio, Missouri, Connecticut, Indiana, Wisconsin, Oklahoma, Kansas, Arkansas, and Nevada. The company also owns Cingular (now AT&T Wireless). It has made a number of acquisitions, including PacTel (April 1997), SNET (October 1998), Ameritech (October 1999), AT&T (November 2005), and BellSouth (December 2006). It operates a total number of consumer revenue connections of 45 million. In 2010, about 52% of its sales came from wireless, 23% from wireline voice operations, 22% were from the data segment, and the remainder from advertising.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.