A "Must Own" Blue Chip Income Stock

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AT&T (NYSE: T) reported third-quarter results of which the highlights were strong EPS growth, record free cash flow generation from operations and $3.8 billion in share buybacks.  If you exclude the divested Advertising Solutions business, the results showed strong consolidated revenue growth led by wireless, U-verse, and strategic business services.

In the third quarter, AT&T's consolidated revenues totaled $31.5 billion, flat in comparison to the same quarter of the previous year. When the divested Advertising Solutions business unit revenues are excluded, consolidated revenues grew by 2.6% in the same quarter of 2011, operating expenses were $25.4 billion versus $25.2 billion almost flat on a year over year basis. Excluding Advertising Solutions, operating expenses at $25.4 billion were up by 3.4% compared to $24.6 billion in the same quarter of the previous year. Operating income was $6.0 billion, down from $6.2 billion and operating income margin was 19.2 percent, compared to 19.8 percent. Third-quarter 2012 net income attributable to AT&T was $3.6 billion, or an EPS of $0.63 per diluted share compared to $3.6 billion, or an EPS of $0.61 per diluted share year on year. When adjusted for Advertising Solutions, earnings per share were $0.62 compared to $0.59 in the comparable quarter of 2011.

Third-quarter 2012 cash flows generated from operating activities were $11.5 billion, a record figure for the company while capital expenditures were $4.9 billion. Free cash flow - cash from operating activities minus capital expenditures -was $6.5 billion, also is also a record f figure The company expects free cash flow to be $18 billion or higher for this fiscal year up from previous guidance of $15 to $16 billion. Capital expenditures for the year are now expected to be at the low end of the $19 to $20 billion range while still on target to build networks.  In fact, the LTE deployment is ahead of schedule and has already covered more than 135 million POPs. During the quarter, the company continued buying back shares under its initial 300 million shares repurchase authorization and a second 300 million share buyback authorization also was approved by the AT&T board during the third quarter. For the year to date, the company has repurchased 271 million shares for $9.4 billion.

AT&T showed strong revenue growth for the quarter, including robust wireless data revenue growth and impressive postpaid ARPU gains in the third quarter. Total wireless revenues including equipment sales, and grew by 6.6% year over year to $16.6 billion. Wireless service revenues grew 4.5%, to $14.9 billion in the quarter. Wireless data revenues - driven by mobile Internet access, access to applications, messaging and related services -grew by more than $1 billion, or 18.3%, from $6.6 billion in the same quarter of the previous year and wireless operating income was $4.4 billion, down 5.6% from the same quarter of the previous year. ARPU at $65.20 increased 2.4% compared to the year-earlier quarter and this is the 15th consecutive quarter AT&T has posted a year-over-year increase in postpaid ARPU.  The company sold 6.1 million smartphones in the third quarter, 1.3 million more than in the third quarter of the previous year. Smartphones represented 81% of postpaid device sales. At the end of the quarter, 63.8% of AT&T's postpaid subscribers had smartphones, up from 52.6 percent, or 36.1 million, a year earlier.

Let's see how some of the key metrics for the company stack up against its principal competitors Verizon (NYSE: VZ) and Sprint Nextel (NYSE: S). Verizon has a debt/equity ratio of 1.40 which is higher than the industry average.  However, this has to be considered in the light of the interest coverage ratio of 6.6 times and the industry average of 4.2 times which means that the company can afford a high level of debt.  Sprint has a debt/equity ratio of 2.51 against an average of 0.72 for the wireless industry.  Interest coverage is a -0.6 times in view of the continuing losses.  However, the situation for Sprint should change significantly after the acquisition by Softbank.  AT&T has the best debt/equity ratio of this group at 0.63 though the interest coverage ratio is much less impressive at 3.2. Meanwhile, the consolidation in the domestic US wireless industry continues with Deutsche Telekom merging its T-Mobile USA unit with MetroPCS (PCS). The deal will increase T-Mobile USA’s subscriber base by about 28% and consolidate its position as the nation’s fourth largest carrier, behind Verizon Wireless, AT&T Mobility and Sprint Nextel.

Since 2009, AT&T's dividend per share has been steadily raised at a rate at over 2% and the company has recently announced a dividend increase from the current annualized level at $1.76 to $1.80 in fiscal 2013.  If you consider that the annual free cash flow is historically above the annual dividend payments the country definitely has the capability to maintain the current pace of the dividend growth.  It is not difficult to predict that the dividend yield will continue to be in excess of the most attractive current yield of over 5%.In the current market situation, it is extremely difficult to find income investments that provide satisfactory returns.  AT&T may not be a hot growth prospect but it is certainly a blue-chip investment income stock that I strongly recommend that you add AT&T to your portfolio.

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