Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Using a Value Line Report: AT&T, a Look at a Dow Dog – March 23, 2012
Value Line’s Justin Hellman sums AT&T (T – Free Value Line Research Report on AT&T) up nicely in the conclusion of the Analyst Commentary when he wrote, “We like this Dow component for conservative investors seeking good risk adjusted returns…” The only thing he might have added to that sentence would be a nod to the company’s 5.6% dividend yield (found in the Top Label section that runs across the top of every Value Line report).
That yield is important for two reasons. One, it adds materially to the company’s total return prospects—it has a 5.6% head start before capital appreciation (or depreciation) are considered. Two, that relatively high yield makes this Dow component a so-called “dog”. The Dogs of the Dow investment strategy is one in which the highest yielding members of the Dow Jones Industrial Average are purchased each year. Those interested should read more about Value Line’s thoughts on the strategy and the full list of the current “dogs”.
The AT&T of today is a far cry from the AT&T of yesteryear, but it remains a dominant force in the telecommunications market—even after government mandated spilt ups and eventual regroupings. In fact, the current AT&T is actually a renaming of SBC Communications, which was a so-called “baby bell” split off that started making growth-oriented acquisitions (including the purchase of its former parent). So the company that once had a virtual monopoly on U.S. telecom services is now one of several companies with a large market share of the domestic land line and cellular businesses.
These two businesses have moved in separate directions of late, with the cellular line growing quickly and the land line slowly declining. AT&T has positioned itself well for this, however, as land lines account for a shrinking share of the business and cell an increasing proportion. This business shift is by design, not just a reflection of the larger trend’s impact on the company. (More details about the sources of revenue can be found in the Business Description box.)
The company has experienced a material, and very public, setback in its efforts to grow on the cellular side, with the recent decision to not purchase T-Mobile USA. The breakup fee that AT&T owes of $3 billion in cash and wireless spectrum now looks like a poorly decided concession by management. That said, this was simply the most expedient way to gain market share and wireless spectrum—not the only way. AT&T will now begin looking at its other options. So this setback is certainly not a good one, but it is far from a death knell.
Three billion dollars seems like a big figure, and it is, but with a market cap of over $187 billion, it is a manageable one (a company’s market cap can be found in the Capital Structure box). Looking beyond shear size, which doesn’t always lead to financial strength, the telecom giant is a model citizen. It has been awarded Value Line’s top ratings for Financial Strength (A++) and Stock Price Stability (100) (both of these proprietary measures are found in the Ratings box at the bottom right of the report).
Financial Strength and Stock Price Stability are the two components used to create Value Line’s Safety rank, found in the Ranks box. As one might expect, earning top honors in the two underlying measures leads to top honors in the Safety rank, where AT&T earns a 1, Highest. So, the current troubles are unlikely to materially derail this company as it looks to continue expanding in the future.
In fact, looking forward, the company appears well positioned to prosper—in spite of the failed merger. It is one of just a small number of cellular giants in The United States, and it has material market share. As demand for mobile access to data and telephone services increases, AT&T will benefit. That growth may be “slow and steady,” but the shift to cellular services is fairly well defined.
This is where the dividend comes in to play. While Hellman is projecting revenues to rise slowly over the next three to five years, earnings are projected to grow twice as fast and dividends are expected to increase about in line with inflation. So, the high dividend yield of today is likely to hold on to its purchasing power over time—note that AT&T has increased its dividend distribution in every year shown in the Statistical Array. This was true even through the recent recession (recessions are denoted by gray bars on the Graph).
Looking at the entire picture, AT&T is a giant in a growing market. It is financially strong and has a history of paying a large and increasing dividend. That’s a pretty compelling story for investing, regardless of the fact that it is a “dog.” Since some companies that find themselves in the “dog house” get there because of poor company performance, AT&T would seem a pleasant exception that, as Hellman suggests, “…would make a fine addition to most diversified portfolios.”
At the time of this article's writing, the author did not have positions in any of the companies mentioned.