Is AT&T a Good Stock to Buy?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AT&T  (NYSE: T) recently made our list of stable income stocks that insiders like; it saw an insider buy earlier this year when board member Scott Ford bought over $2 million worth of the company’s stock. The telecom giant also pays a generous 4.9% dividend yield at current prices, and unlike some other high-yield stocks, it has not seen a sharp decline in its stock price (AT&T is up 21% over the last year, outperforming the S&P 500). As a result, we decided to take a closer look at the stock.

In the second quarter of 2012, AT&T reported revenue that was about even with the second quarter of 2011. Growth in wireless and data services offset weaker business in wireline and advertising sales (the company sold a part of its advertising segment). Net income was up 9% as cost of services fell, and with the company repurchasing a small number of shares, earnings per share rose to $0.66 from $0.60. This built on smaller growth in the first quarter, with AT&T ending up reporting 7% higher earnings in the first half of the year than in the same period last year.

AT&T trades at 47 times trailing earnings, though this figure includes a poor Q4 2011. Annualizing the first half of 2012 yields a P/E of 14 (though this assumes that last year’s lower Q4 was not due to seasonal factors), with analyst estimates for next year implying a forward P/E of 14 as well. We’ve already mentioned the company’s dividend yield; like clockwork, the company has increased its dividend by a penny per share in 2009, 2010, 2011, and 2012. With cash flow from operations on the rise, we think that AT&T should at least be able to maintain its current dividend payments, if not continue increasing them.

Donald Chiboucis’s Columbus Circle Investors liked AT&T during the second quarter, as the family of funds initiated a position of 5.3 million shares (see more stock picks from Columbus Circle Investors). Adage Capital Management sold a small percentage of its position but still owned 8.1 million shares at the end of June. This made it one of Adage’s ten largest 13F positions at that time by value (find more of Adage Capital Management's favorite stocks).

Sprint Nextel (NYSE: S), Verizon  (NYSE: VZ), MetroPCS (NYSE: TMUS), and Nokia (NYSE: NOK) are four other telecom companies that are peers to AT&T. Sprint, in which SoftBank is purchasing a majority stake, is unprofitable on a trailing basis and is expected to lose money next year as well. However, the stock price has doubled in the last year, and certainly SoftBank thinks it is a worthwhile buy. With fairly low revenue growth, however, we would need to see its low-pricing strategy get better traction in the market.

Verizon looks similar to AT&T in terms of its multiples: it trades at 44 times trailing earnings and 16 times forward earnings estimates, similar to the figures we’d discussed above. It’s also gotten steady growth, with earnings in the second quarter coming in 13% higher than in the same period a year ago, and a good dividend yield at 4.6%. We think that the two companies are priced about even compared to each other.

Nokia, like Sprint, has been seeing negative earnings, though it is supposed to come closer to profitability in 2013; analysts expect a loss of $0.10 per share, as opposed to $0.41 per share for 2012. This is despite revenue numbers that are lower than a year ago. The dividend yield is remarkably high, at 6.7%, but that’s more due to the 56% drop in the stock price in the last year than any commitment to returning cash to shareholders, and we aren’t sure that the company will maintain its dividend. MetroPCS looks like the most reliable value play, at trailing and forward P/Es of 13 and 15 respectively, and in the second quarter it turned steady revenue growth into a large pop to its earnings. It doesn’t have as good a brand as Verizon or even AT&T, but its relative value does look attractive.

AT&T has a number of attractive characteristics, though we worry that it and Verizon have their pricing tied so tightly to better performance next year than what they have done on a trailing basis. With that in mind, it might be worth considering MetroPCS as an alternative telecom investment.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in T. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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