I have had several readers request that I do an article on AT&T (T). Since the company has just reported earnings, which have thus far received a strong and positive reaction from Wall Street, I thought now would be a good time. Following their earnings report, an article published on July 25, 2017 at 4:17 PM EDT in Bloomberg Technology led off with this provocative title: “AT&T Shares Jump Most In 8 Years On Surprise Mobile Gains.” Here is a short excerpt from the article, however, for those interested in investing in AT&T, I suggest they follow the above link and read the entire article: “AT&T Inc. shares surged the most in more than eight years after the telecommunications giant posted a surprise wireless subscriber gain in the second quarter, showing it can fend for itself in a cutthroat price war. Second-quarter earnings topped estimates, and wireless customers rose by 127,000, compared with analysts’ average projection for a loss of 22,713. An offer for unlimited wireless data, bundled with discounted streaming-TV service, helping AT&T bide its time while awaiting regulatory approval to transform into a media powerhouse through the $85.4 billion purchase of Time Warner Inc. AT&T rose as much as 5.2 percent to $38.09, the biggest intraday gain since March 2009.” However, what is currently happening to AT&T’s stock price is a short-term reaction – positive as it may be. Nevertheless, I believe the more important questions are is AT&T a good long-term investment, and perhaps more importantly, what kind of an investor is AT&T an appropriate option for? In order to effectively answer these questions, it’s important to recognize the specific investment opportunities that AT&T offers long-term. I will start off by suggesting a possible answer to the second question by restating comments I previously made on what type of an investor that I believe AT&T is appropriate for, and later I will address whether or not AT&T is a good long-term total return investment.
Who is AT&T An Appropriate Investment For?
“Once an investor enters retirement it is not uncommon that their investment objective turns from total return to a safe income stream. And if they planned and prepared properly, the income they receive from their portfolios can support their families during their remaining so-called Golden years. Icing on the cake would be the potential for their income stream to grow. Although income growth is important to fight the threat of future potential inflation, it might also be wise and prudent to consider it secondary to safety. In the past, and during normal economic and market environments, bonds and other fixed income instruments could be turned to for their high yield and safety characteristics. However, with interest rates continuing at historic low levels, the typical advantages to fixed income have been greatly reduced. The highest quality bonds available today offer little in the form of yield, and due to the threat of potential future interest rate increases, their typical safety attributes have also been reduced. Simply stated, if interest rates rise in the near future, the prices of previously purchased bonds will fluctuate downward. Depending on how high and how quickly interest rates rise, the potential volatility of previously issued bond prices could be abnormally high. Moreover, if interest rates were to return to historical norms, the possibility exists that long-term previously issued bond prices could fall to the same degree or worse than we saw equity prices fall during the Great Recession. Therefore, I would argue that the only truly safe bonds today are those of very short duration. Unfortunately, high-quality short-term bonds do not pay very much. This low interest rate environment has motivated many investors to turn to blue-chip dividend paying stocks to provide income for their retirement portfolios. In the general sense, given these conditions, I’m in favor of that action, at least temporarily until interest rates return to more normal levels. And of course, given that investors are careful to only invest when valuation is sound.” The above is taken from an article I wrote on August 29, 2014 where I covered AT&T and Consolidated Edison (ED). The point I am making by repeating it is that AT&T may be an appropriate investment for those investors that are in need of high current spendable income. Although I would not consider AT&T a pure bond alternative under normal circumstances, it might be currently given the continuing low interest rate that bonds offer. Stated more succinctly, I see AT&T as an attractive income producing vehicle, but not necessarily a high long-term total return opportunity.
Is AT&T a Good Long-Term Total Return Investment?
I believe that it’s imperative that investors possess a clear understanding of the nature of the beast regarding any stock they are considering investing in. Furthermore, I do not believe you can ascertain that by focusing on how the stock price is acting in the short run. Instead, you can only comprehensively understand what an investment in a common stock can offer, by understanding and evaluating the underlying fundamentals. I call this investing with your eyes wide open. In other words, before you invest in the stock you should clearly understand what the business is capable of generating on your behalf as a shareholder. Regarding AT&T specifically, the following very short business description, courtesy of S&P Capital IQ, provides a brief overview of the company’s current business. However, the reader should consider that this company has changed and evolved over the years since it was founded in 1885. Today’s AT&T began as Southwestern Bell Corporation, which was one of the seven regional Bell operating companies that were created by the federally mandated forced antitrust breakup of the original Ma Bell. In 1995, Southwestern Bell changed its name to SBC Communications, and in 2005 they purchased the former AT&T Corp. and took on their iconic brand and stock symbol. Ergo, this is not your grandfather’s AT&T! “AT&T Inc. provides telecommunications and digital entertainment services. The company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility, and International. The Business Solutions segment offers wireless, fixed strategic, legacy voice and data, wireless equipment, and other services to business, governmental, and wholesale customers, as well as individual subscribers. The Entertainment Group segment provides video entertainment and audio programming channels to approximately 25.3 million subscribers; broadband and Internet services to 12.9 million residential subscribers; local and long-distance voice services to residential customers, as well as DSL Internet access services; and voice services over IP-based technology, and technical support and other customer service functions and equipment. The Consumer Mobility segment offers wireless services to consumers, and wireless wholesale and resale subscribers, such as long-distance and roaming services. This segment provides postpaid and prepaid wireless voice and data communications services; consulting, advertising, and application and co-location services; and sells a variety of handsets, wirelessly enabled computers, and personal computer wireless data cards through company-owned stores, agents, or third-party retail stores, as well as accessories, such as carrying cases, hands-free devices, and other items. The International segment offers digital television services, including local and international digital-quality video entertainment and audio programming under the DIRECTV and SKY brands throughout Latin America. This segment also provides postpaid and prepaid wireless services to approximately 12.0 million subscribers under the AT&T and Unefon brands; and sells a range of handsets. The company was formerly known as SBC Communications Inc. and changed its name to AT&T Inc. in November 2005. AT&T Inc. was founded in 1983 and is based in Dallas, Texas.”
AT&T Has Evolved Over the Years
AT&T has clearly evolved from the beloved “Ma Bell” it once was to the company it is today. The following slides from its 2017 Q2 earnings call address the company’s continuing evolution. The first slide addresses the results received from the DirecTV merger and the second slide addresses the pending Time Warner transaction.
The important takeaway is that AT&T has and continues to pursue large acquisitions with the objective of growing and diversifying their revenues. In my opinion, these strategies represent both a risk and an opportunity. The risk relates to achieving integration synergies and goals, and the opportunity represents the need to replace and supplant their shrinking wired business. This is critically important because AT&T’s wired business continues to represent approximately 50% of their revenues.
Summary and Conclusions
Clearly, AT&T has not been a huge generator of capital appreciation or even a high total return investment. On the other hand, AT&T has produced a consistent and above-average level of dividend income for its shareholders. However, although the dividend has consistently grown, the dividend growth rate has been low. Consequently, I think AT&T represents a good option for investors requiring a high level of current spendable income. However, although I would not directly call it a bond alternative, it is an above-average yielding stock that can be currently utilized in lieu of bonds. Finally, investors in AT&T should be realistic regarding its modest level of capital appreciation potential. AT&T is trying to accelerate its growth, but the headwinds of the shrinking Wireline business is a formidable deterrent. Disclosure: Long T. Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.