AT&T INC. $35(New York symbol T; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 5.8 billion; Market cap: $203.0 billion; Price-to-sales ratio: 1.6; Dividend yield: 5.0%; TSINetwork Rating: Average; www.att.com) has 105.2 million wireless subscribers across the U.S. That makes it the country’s second-largest wireless-service provider, after Verizon Wireless. AT&T gets 52% of its revenue and 70% of its earnings from its wireless business.
The wireline division supplies most of the company’s remaining revenue and earnings. This business sells land line services, TV packages and high-speed Internet access to 40.2 million customers.
AT&T’s revenue rose 3.5%, from $119.8 billion in 2007 to $124.0 billion in 2008. Revenue fell 0.8% in 2009, to $123.0 billion, due to weaker demand for traditional phone services. Revenue rebounded to $124.4 billion in 2010, and to $126.7 billion in 2011.
Earnings fell 26.4%, from $17.0 billion in 2007 to $12.5 billion in 2009. The company is an aggressive buyer of its own shares, so earnings per share fell at a slower pace of 23.2%, from $2.76 to $2.16.
Earnings then recovered to $2.29 a share (or a total of $13.6 billion) in 2010, but slipped to $2.20 a share (or $13.1 billion) in 2011.
Freeing up cash for new investments
In May 2012, AT&T sold 53% of its Yellow Pages telephone directory business to private equity firm Cerberus Capital Management, L.P. In return, the company received cash of $750 million and a $200-million note. Selling this stake makes sense for AT&T because telephone directories are facing rising competition for advertising from Internet search engines.
In the three months ended June 30, 2012, the company’s revenue rose just 0.3%, to $31.6 billion from $31.5 billion a year earlier. However, if you account for the sale of the directory business, revenue would have gained 2.0%. Revenue at AT&T’s land-line business fell 10.1%. However, gains in wireless (up 4.3%) and data (up 7.8%) helped offset that decline.
Earnings rose 8.7%, to $3.9 billion from $3.6 billion. The company bought back $2.5 billion worth of its shares during the quarter. As a result, earnings per share rose 10.0%, to $0.66 from $0.60.
Until recently, AT&T was the exclusive U.S. carrier of Apple’s hugely popular iPhone. However, Apple ended its deal with AT&T in February 2011 and let rival carrier Verizon Wireless start selling the device.
Focus on Android boosts profits
AT&T is offsetting the loss of the iPhone deal by selling more smartphones and tablet computers powered by Google’s Android operating system. The company earns higher profits on these phones because makers of Android devices charge wireless carriers lower fees than Apple.
Moreover, AT&T knew it would someday lose exclusive access to the iPhone. That’s why it has signed up many of its iPhone users to long-term contracts; long-term customers rose 1.9% in the latest quarter, and now account for 66.2% of total subscribers.
In the latest quarter, AT&T attracted 1.3 million new wireless subscribers, net of cancellations. It also activated 3.7 million iPhones, with 22% of these users new to AT&T.
The company continues to upgrade its wireless networks to Long-Term Evolution (also called 4G) technology, which is up to five times faster than current wireless networks. AT&T now offers 4G service in 47 U.S. cities. Demand has been strong: over a third of AT&T smartphone users with long-term contracts now have a 4G device.
The company’s faster, more reliable wireless networks will help it hang on to its current customers and attract new ones.
Moreover, AT&T recently upgraded its payment plans to let subscribers buy a pool of wireless data and share it among a number of devices, including smartphones, tablet computers and laptops, instead of buying a separate plan for each device.
Fibre optic TV growing strongly
The company is also fuelling its long-term growth with its U-verse service, which uses high-speed fibre optic technology to deliver a package of services, including phone, Internet and TV signals. The company had 6.8 million U-verse subscribers on June 30, 2012, up from 4.4 million a year earlier.
For all of 2012, AT&T will probably spend $20.5 billion on expanding and upgrading its wireless and U-verse networks. The company’s cash flow will probably exceed $32.5 billion for the year, so it can easily afford these investments.
AT&T’s balance sheet remains strong: its long-term debt of $61.1 billion is a moderate 30% of its market cap. It also holds cash of $2.2 billion.
The stock trades at 14.8 times AT&T’s projected 2012 earnings of $2.37 a share. The $1.76 dividend yields 5.0%.
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