AT&T Earnings: Great Dividend and Growth

Matthew 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) is one of two dominant telephone and broadband companies in the U.S. along with Verizon (NYSE: VZ). A favorite among dividend investors, AT&T features the higher payout of the two, currently at 5.25% as opposed to 4.8% for Verizon. With AT&T set to report earnings next Thursday, investors will be looking for signs of future growth, especially when it comes to smartphones and the income that goes along with their data usage.



 

AT&T has built itself into an industry leader with a series of acquisitions including Cingular Wireless and BellSouth, and it offers an innovative collection of products and services.  For example, the company launched its fiber-based network in 2006, in order to offer video and broadband services.  The service, which has evolved into what we know as “U-Verse,” had 6.8 million customers as of 2012, which grew a remarkable 55% from the year before.  Everyone I have talked to who is a U-Verse subscriber has nothing but positive things to say, so I wouldn’t be surprised if the service were to continue a double-digit growth rate for many years.   Any positive news on the growth of U-Verse would be very welcome news during the earnings call. 

In mid-2007, AT&T became the exclusive U.S. supplier of Apple’s (NASDAQ: AAPL) iPhone, activating more than 25 million in the 2010-2011 years alone.  In early 2011, Verizon and Sprint (NYSE: S) started to offer the iPhone, slowing AT&T’s new activations, however AT&T was still activating new iPhones at the rate of about 3.5 million per quarter.  Of course, AT&T offers many other smartphones, however iPhone numbers are worth paying attention to, not only for an indication of how AT&T is doing, but how Apple is doing as well (Side note: Apple reports earnings the day before AT&T). 

AT&T’s edge over its competitors has to do with their focus on increasing data usage.  Currently, 43% of the post-paid wireless revenue is from data, with average monthly revenue of $65 per customer, nicely ahead of Verizon’s $56.  During the earnings call, listen closely for an update regarding data revenues or average revenue per customer.  If data revenue is increasing quicker than expected, this could be a very positive catalyst for the stock.  If, however, growth appears to be slowing, this could be taken very badly by the market. 

In terms of the previously mentioned high dividend, AT&T has an excellent record of raising the dividend, even during the tumultuous 2008-09 period. Currently paying out 5.25%, AT&T is one of the best large-cap dividend stocks on the market.  To borrow a favorite quote of mine from Jim Cramer, AT&T is like “a bond with upside.” 

Finally, in terms of valuation, AT&T is pretty attractive, currently trading at 13.9 times 2012’s consensus earnings of $2.38 per share, which are expected to grow to $2.54 and $2.73 in 2013 and 2014 respectively.  Therefore, AT&T is expected to grow earnings at 7.1% annually over the next couple years, which certainly justifies its valuation. 

When the earnings report comes out, more important than the actual numbers is the forward outlook, particularly any talk about growing margins or an increase in data revenues.  Smartphone activations are also key--not only iPhones, but the general trend toward higher-tech phones by consumers should provide increased revenue going forward.

 

 


KWMatt82 owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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