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AT&T Whopping 5.3% Dividend. Is It Worth It?

 January 04, 2013 10:41 AM
 


This is a checklist I use to quickly come to a conclusion on a stock.  I score a stock, each line getting a 1, 0, or -1.  A stock  that scored 1 on each line would be a perfect 10. Unlike Bo Derek was,  it may be impossible to score a 10.  For example if a company were to have a low PEG ratio, it might be because the company's historic growth rate was low and scored a -1 with the analyst community.  All items receive an equal weighting.  Put it another way, I've never found a perfect 10.

Some of these items are quite subjective.  For example how would I score Cash Flow?  If a company's cash flow is much lower than it's reported earnings, that raises a flag and I would score it a -1.  If there are more insiders buying than selling, I would score it a 1.  If there are no apparent catalysts in the near future I would score it a 0 but on the other hand if there is a pending secondary that will put more stock out on the market, I would score it -1.There is one caveat. If for any reason management's integrity and honesty is doubtful, suspend all analysis and wait on the sidelines until this issue is cleared up.  No amount of positive attributes can overcome crooked management.

[Related -AT&T Inc. (T) Q4 Earnings Preview: Direction of Surprise Dictates January EPS Price Response]

1. CHARTknow how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action.AT&T is showing bullish divergence on the 7 day RSI.  This is a very strong swing trading chart pattern. +1

[Related -T-Mobile US Inc (NYSE:TMUS): AT&T Inc.(NYSE:T) Could Suffer In Wireless War]

2. ANALYSTS- read analyst reports but come to your own conclusions. 12 strong buys and buys versus 25 holds and and 2 sells.  I score this a -1

Recommendation Trends


Current MonthLast MonthTwo Months AgoThree Months Ago
Strong Buy6666
Buy6677
Hold25252424
Underperform2122
Sell0000

Data provided by Thomson/First Cal

3. INSIDERS- if the people that know the company the best are not buying it, why should you? Two directors make very large insider buys in T stock score +1

4. MANAGEMENT DISCUSSION and 10Q AND 10K- this is the only truthful thing you will read about a company. It's composed by management, the auditors, and the firm's lawyers.  If all three of them can agree on the verbiage, it's passed a big hurdle.  Read it carefully.  Pay particular attention to the Risks, Litigation, and Related Transaction sections.  These are the things you will wish you had taken the time to read if something goes bad with your investment. According to T's most recent 10k, "Our Wireless segment provided approximately 50% of 2011 total segment operating revenues and 94% of our 2011 total segment income. At December 31, 2011, we had more than 103 million wireless subscribers. We have also begun transitioning our network to next generation LTE technology and expect this network to cover approximately 80% of the U.S. population and to be largely complete by the end of 2013.  "   No reason to look at anything else in my opinion.  AT&T is a wireless play period.  Therefore it's pretty chilling when  the Company states that it's running out of wireless frequency bandwidth.  "As the wireless industry continues to mature, we believe that future wireless growth will increasingly depend on our ability to offer innovative data services to customers, which in turn, will depend on the availability of additional spectrum. We are facing significant spectrum and capacity constraints on our wireless network in certain markets. We expect such constraints to increase and expand to additional markets in the coming years. While we are continuing to invest significant capital in expanding our network capacity, our capacity constraints could affect the quality of existing voice and data services and our ability to launch new, advanced wireless broadband services, unless we are able to obtain more spectrum. Any spectrum solution will require that the FCC makes new spectrum available to the wireless industry and allows us to obtain the spectrum we need more immediately to meet the needs of our customers.  This would be alarming but given Verizon warns of capacity constraints as well, it's not just a problem just for AT&T.  It is perceived that Verizon is further along on their LTE network but it may only be by a matter of a few months. 

Retirement obligations are scary large since "At December 31, 2011, we had approximately 335,000 retirees who, along with their dependents, were eligible to receive retiree benefits."  Fortunately for them it's mostly funded according to AT&T. At the end of 2011, AT&T had $56.1 billion in pension obligations, while the fair value of plan assets stood at $45.9 billion.  Operating income decreased $198, or 3.2%, in the third quarter and increased $747, or 4.1%, for the first nine months of 2012. Both operating revenues and expenses for the quarter were affected by the May 2012 sale of our Advertising Solutions segment, as discussed below. Operating income in the third quarter and for the first nine months reflects continued growth in wireless service and equipment revenue, driven mostly by data revenue growth, along with increased revenues from AT&T U-verse® (U-verse) services and strategic business services. Growth in wireless and wireline revenues in the third quarter was more than offset by higher expenses driven primarily by increased wireless equipment, commissions and administrative costs. Our operating income margin in the third quarter decreased from 19.8% in 2011 to 19.2% in 2012 and for the first nine months increased from 19.3% in 2011 to 20.0% in 2012.

5. RELATIVE PERFORMANCE-  this will depend on the time period of course.  If a company has been underperforming the markets, it's not likely its going to start outperforming just because you bought it.  Over the last year AT&T has performed in line with the S&P 500. Over the last three months, it's underperformed by 10%.  Score this a 0

6. SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience.  AT&T and Verizon are almost in a category by themselves.  Overall I think the market is pretty bullish on the outlook for smartphones and wireless. Score this a +1

7. CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.  AT&T has had pretty stagnant cash flow growth in line with very little earnings growth. At least the two are in line with one another so I would score this a +1

8. PEG RATIO- it's good to find a company growing faster than it's multiple.AT&T is not growing, score this -1

9. VALUATION- contrary to popular opinion, it does matter what you pay for a company.  Check its  discounted cash flow value.  Buy it for less than what it's worth, a 1, less a -1, about the same 1. AT&T is close to fairly valued at current price.  Score this +1

10. CATALYST- what's going to change the status quo?  I'm having a hard time understanding what the two large director buys mean.  One of them may have something to do with charitable gifts and taxes but the other one looks like a straight $multi million dollar purchase.  I do have some theories with scant evidence to back them up, though.

Revenues for AT&T are essentially flat but operating margins of approximate should lead to a much higher valuation in this low interest environment.  It seems that wireless telephony is much more recession resistant than other consumer purchases.  The Wall Street Journal ran an article on how people would sooner give up going out to eat and other small luxuries than their smartphone connected lifestyle.  The smartphone is looking like a very essential piece of living this decade.  With that in mind the operating margins appear stable leading to much higher valuation on the DCF model.

 One of the rubs analysts have on all cellular plays is capital intensity.  T'hat may be slowing down as both carriers are closer to completing their build outs on their 4G LTE networks.  Also the subsidy paid for smartphones may be less onerous as competition is growing in the smartphone marketplace.  Competition in technology invariably drives down prices and this should benefit the carriers as opposed to the smartphone manufacturers like Apple.  At least for now until someone comes up with the next end all -be all smartphone.  This trend could show up as early as 4th quarter earnings.  If this looks like a trend when they report earnings in January, expect a few analysts to jump from hold to buy on their recommendation and a ramp up in the stock price. Considering these two catalysts I score it as +1

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