3 Reasons It's Not as Bad as You Think at AT&T Inc.
AT&T investors never seem to be satisfied with the company's performance. In the last year, the stock has traded in a range of $33 to $39 and today shares trade near that low point. The good news for long-term investors is, the company's recent performance wasn't nearly as bad as some might believe. In fact, I can give you three reasons why AT&T could be a buy at these levels.
A huge opportunity in a highly competitive industry
One of the biggest challenges AT&T faces is the company must repair its wireless image and continue to improve this division's performance. With Verizon constantly lampooning AT&T's wireless coverage, and smaller carriers trying to steal customers, AT&T has a tough road ahead of it.
However, the first reason it's not as bad as you think at AT&T is, the company is improving its wireless division. AT&T said it expects continued margin improvement in wireless.
One way the company can increase its margin is by keeping its wireless churn rate low. AT&T reported a churn rate of 1.1%, a significant improvement over 1.4% last year. Verizon Wireless' churn rate used to be significantly lower than AT&T, but with Verizon at 1% this difference has compressed.
Even though Verizon witnessed a near 5% increase in postpaid additions, AT&T nearly kept pace with a 3% gain. AT&T has 77% of its subscribers using more profitable smartphones compared to 70% at Verizon. If AT&T can continue to improve its wireless margin and keep growing subscribers, AT&T investors should be pleased with the results.
For a company this size, a 40% improvement is amazing
While AT&T faces Verizon and smaller competitors in wireless, companies like CenturyLink post a threat of their own to AT&T's highly profitable wireline business. It's no secret that customers are cancelling their landlines in favor of wireless, but local telecoms are fighting back with broadband and video offerings.
While CenturyLink saw high-speed Internet connections increase by just over 2%, Verizon did even better with FiOS Internet connections up nearly 12%. AT&T has nearly double the number of high-speed Internet customers as Verizon, yet still grew this business by 0.2% on a year-over-year basis.
When it comes to video subscriber growth, AT&T managed a better than 20% growth rate in video subscribers, which was far superior to its peers. In part due to the strength of AT&T's improving wireless and wireline business, AT&T generated almost 44% more core operating cash flow (net income + depreciation) than the year before. This significant cash flow growth is the second reason the AT&T story isn't as bad as you think.
Though Verizon did slightly better with a near 49% increase in operating cash flow, CenturyLink wasn't in the same league with an increase of less than 5%. The bottom line is, if AT&T could generate huge cash flow growth without optimal margins, the company should do even better as these businesses improve.
Time for some perspective
With the S&P 500 increasing in value by nearly 30% last year, some have lost sight of the fact that long-term investors can't expect this type of return every year. Though AT&T might seem boring, this is the type of stock that long-term investors can rely on.
Investors looking for yield might opt for CenturyLink and its almost 8% payout. However, the company carries a higher relative debt load than either AT&T or Verizon. In addition, CenturyLink used about 49% of its operating income paying interest in the most recent quarter. Though the company's core free cash flow (net income + depreciation-capital expenditures) shows a payout ratio of 47%, this high interest expense is a challenge that can't be ignored.
While Verizon is a strong competitor to AT&T, there is no way around the fact that Verizon's investors must rely on the company's ability to grow earnings. With a yield of less than 4.5%, AT&T's yield beats Verizon by a full percentage point.
AT&T pays a yield of about 5.5% and carries the lowest debt-to-equity ratio of the three companies. With just 12% of the company's operating earnings being used to cover interest, and a roughly 61% core free cash flow payout ratio, AT&T's yield is the third reason this story isn't as bad as you might think.
AT&T's 5.5% yield and an expected earnings growth rate of 6.5% may not sound that exciting. However, a 12% potential total return would theoretically double an investment in just six years. If you are looking for a good source of growth and income, I would suggest adding the big T to your Watchlist today.
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The article 3 Reasons It's Not as Bad as You Think at AT&T Inc. originally appeared on Fool.com.
Chad Henage owns shares of CenturyLink and Verizon Communications. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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