Tuesday, February 5, 2013

AT&T: For growth and income

AT&T (T), the Fortune 500 company and the Dow Jones Industrial Average member, is among the highest-yielding stocks in the entire S&P 500 universe.

But it isn't just an income play � the company also satisfies both of the objectives of our Growth & Income portfolio. In addition, the firm is well-poised to increase its earnings.

AT&T has been reshaping its business� looks and operations ever since its 1984 breakup. In the last few years alone, the company sold some slower-growing businesses, such as the Yellow Pages, and invested in faster-growing ones.

High fixed costs in the telecom business axiomatically mean that more subscribers lower costs for each new subscriber. More subscribers in turn, therefore, raise profitability and improve future dividend prospects.
While the traditional wireline business continues to decline, the real avenue for growth of today and tomorrow is via the wireless business � in particular, through promotion of smartphones and data usage (AT&T has more than 44.5 million smart- phone subscribers).

Upgrades and price increases, combined, simultaneously increase revenues, margins and absolute profits. In the third quarter of 2012 alone, while consolidated revenues rose only 2.6 percent, AT&T wireless revenues increased 6.6 percent � and data revenues, 18.3 percent.

With the largest 4G network in the U.S., going forward AT&T stands likely to further expand its advantage. And these days, 81 percent of total AT&T�s revenue comes from its �growth� businesses � including wireless, wireline data and managed IT services.

A record level of free cash flow is another good sign, as is the company�s significantly reduced debt. This past summer, AT&T�s board authorized a $11.1 billion stock repurchase � thereby doubling its previous share buyback program, in effect since late 2010.

With this plan in place, the company can buy back about 300 million shares, or 5 percent of its float, significantly reducing the share count � while increasing EPS.

Overall, the company maintains a large payout, while extra growth creates great potential to further boost future dividends.

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