AT&T INC. $30 (New York symbol T; Income Portfolio, Utilities sector; WSSF Rating: Average) is the largest telecommunications company in the United States, with 47.9 million traditional lines in service in 13 states. It’s also the nation’s largest provider of wireless services, with over 57 million customers.
The company took its present form and name in November 2005 when SBC Communications Inc. acquired the old AT&T Corp. for $16.3 billion in cash and stock. AT&T stockholders wound up owning 16% of the combined company.
The new company gets roughly 50% of its revenue from providing telephone and data services to businesses. Its wireless and consumer businesses each supply 25% of its revenue.
In the three months ended June 30, 2006, the acquisition of AT&T pushed earnings up 80%, to $1.8 billion from $1.0 billion a year earlier. Due to more shares outstanding, per-share earnings grew just 53.3%, to $0.46 from $0.30. Revenue rose 53.4%, to $15.8 billion from $10.3 billion.
In its first full year, the new company will probably earn $2.21 a share ($8.2 billion) before restructuring and other non-recurring costs, on revenue of $63 billion. The stock now trades at just 13.6 times that earnings estimate, and 1.9 times its revenue of $16 a share.
The company is still losing local and long distance customers to new competitors that transmit phone calls over the Internet, instead of through more costly traditional telephone networks. But the merger will help it build up its own Internet and wireless operations.
Second big merger in less than a year
AT&T already owns 60% of Cingular, the largest provider of wireless services in the U.S. It now plans to buy rival phone company BellSouth Corp., which owns the other 40% of Cingular.
AT&T will issue around $70 billion worth of stock to BellSouth investors, which will give them a 38% stake in the merged company.
The company will probably overcome anti-trust concerns and complete the purchase by the end of 2006. It feels the BellSouth merger will save it $2 billion a year. That’s on top of the $3 billion in annual savings it expects from the acquisition of the old AT&T.
These saving should help AT&T fund its plan to repurchase at least $10 billion worth of its stock by the end of 2007.
Owning 100% of Cingular should make it easier for AT&T to expand its wireless networks to handle more high-speed traffic, such as live video and games.
Cingular is now switching to the GSM wireless standard, which most wireless providers in Europe and
Asia use. That should help Cingular earn more roaming fees from its own customers, as well as from foreign wireless customers in the U.S.
Fiber optic project looks promising
AT&T is also spending heavily to upgrade its traditional land lines to fiber optic cable.
Called Project Lightspeed, this initiative should pave the way for AT&T to offer its customers highdefinition TV signals and video-on-demand services. The company hopes to launch these new services in 15 to 20 markets by the end of this year.
Offering a variety of services (phones, Internet, wireless, TV) in long-term, discounted bundles helps AT&T hang on to customers. Subscribers to these packages also tend to buy more services as they become available.
Upgrading its systems to handle new services will increase AT&T’s capital spending in 2006 to $2.15 a share (excluding BellSouth), up 49.3% from $1.44 in 2005. But the company’s cash flow is also growing strongly, from $3.42 a share in 2005 to around $5.20 in 2006, so it can easily afford these outlays.
Since the company prefers paying for acquisitions with stock, long-term debt is a reasonable 0.5 times equity. That gives AT&T plenty of flexibility to increase its $1.33 dividend, which yields 4.4%.
The merger with the old AT&T greatly expanded the company’s research operations. It now has access to the old AT&T’s advanced fiber optic and speech recognition technologies, as well as its network management software.
These technologies will help AT&T improve its current products and services. It can also earn income by licensing this technology to other companies.
Safe choice for income-seekers
The stock has gained 25% since the SBC/AT&T merger. But we feel that it still has plenty of room to grow, particularly as the pending acquisition of Bell- South greatly strengthens its long-term earnings potential, and gives it more cash for dividends.
We are adding AT&T to our WSSF Portfolio for Income-Seeking Investors. The stock is a buy.