Ma Bell Looks to the Future

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For some time, AT&T (NYSE: T) has been considered a mega-cap telecommunications utility with a wireless growth engine. The wireless space is becoming more and more saturated with other big players from Verizon to T-Mobile.  AT&T has seen this shift coming and has diversified itself accordingly.  Unlike Verizon, who shed their rural wireline division to Frontier Communications (NASDAQ: FTR), AT&T doubled down on their current wireline assets.  AT&T stated that they are looking to cover nearly their entire customer base with broadband connections using both their wireline and wireless LTE networks. In addition to that, AT&T has been aggressively repurchasing their own shares and has created a great scenario for its shareholders.

The future in the bundle war

The wireline industry is mature and crowded. With competition from smaller rivals like Frontier and Windstream (NASDAQ: WIN) in rural markets, AT&T and the U-verse product line hold a distinct advantage over these smaller companies when it comes to bundling.  AT&T wants to become the single point of contact with its customers by bundling four of their services together: U-verse, broadband internet, landline, and wireless phone. As U-verse becomes available in more markets, they will become stickier to their current customers. Last year AT&T lost 4.4% of their wireline customers while maintaining their margins. Competitors Frontier and Windstream have shed 8.8% and 4% of their customers, respectively, while running on razor thin margins as Frontier and Windstream try to lock in long term contracts by bundling landline and broadband services together. In markets where AT&T is a wireless cell phone provider but does not have a U-verse presence planned yet, it has setup a contract with DirectTV to bundle TV service as well. Not to be left behind, Frontier has inked a deal with Dish Network to offer satellite TV bundles in some geographies. Ma Bell is coming out strong on this battle front.

Share buybacks

AT&T had a record year in 2012 with $19.4 billion in free cash flow, and has repurchased more then 371 million shares of its own stock.  AT&T is unique from most companies that repurchase their own stock, in the fact that Ma Bell also sports a dividend north of 5%. On their most recent conference call, AT&T has stated that they have saved over $700 million in 2012 on dividends that they didn’t have to pay out because of this share repurchase.  This is money that never leaves AT&T’s pocket that can be used for anything from CapEx to funding their pension plans, to rewarding shareholders with more buybacks and dividends.  This is the exact opposite of what Windstream did by increasing their share count form 436 million in December of 2009 to 588 million as of their most recent filing. 

Expansion on the horizon?

Here is some food for thought regarding AT&T’s long term geographic expansion.  On the 4Q 2012 Q&A section of the conference call, one analyst asked if AT&T is looking to expand into markets outside of the US. CEO Randall Stephenson said AT&T’s policy is not to comment on M&A, but they are looking to create partnerships with non-US carriers like China Telecom to utilize each others networks. However, since we have seen AT&T aggressively try to swallow up smaller competitor T-Mobile last year, it may not be too far fetched to see them try to expand their footprint outside of the US. International carriers with cheap valuations like Telefonica would drastically increase Ma Bell’s high-heel print into that of an oversized bowling shoe, all while give her exposure to the high growth markets of Latin America.

Foolish bottom line

Verizon is typically seen as a peer to AT&T when it comes to wireless, but Ma Bell’s footprint in rural America makes her uniquely positioned to become her customer’s single point of contact, for all things related to communication. AT&T also has a plan of attack for when the wireless and Smartphone market becomes fully saturated.  AT&T’s prudent use of their free cash flow to reward shareholders and strategy for the future makes it an attractive buying opportunity now.

wpatoka has a position in AT&T. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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