It seems that everywhere I turn on the blogosphere these days, someone else is touting the fortunes of AT&T. From first glance, the company looks pretty promising. Their share price is struggling during an up market. The dividend is a succulent 6.5%. The business is relatively stable. Heck, I even own shares in a Canadian telecom. (Telus) Are things as good as they seem?
Why Is It Cheap?
There’s nothing really noticeable in the news when it comes to AT&T. Yet there are many things that could be dragging the stock down. The company has a ton of debt. Growth in the land line business is non existent; wireless growth is hardly better. There are lots of competitors in their market, none of them are doing especially well either. So the response is to cut prices. Price wars generally aren’t good for business.
As mentioned above, the outlook for the industry is fair at best. It’s a tough time to be a telecom company. It’s a very capital intensive business, with technology that goes outdated fairly fast. On the plus side, you gotta like a business that signs people up to contracts that basically force them to pay for the length of the contract.
The dividend is a mouth watering 6.5%. ($1.86 per share, 42 cents per quarter) The dividend has gone from 32.3 cents per quarter at this point in 2005 to 42 cents now, a growth rate of a little less than 5.5% per year over the last 5 years. Whether the dividend is sustainable or not is another question.
The company has a book value of $4.86 per share. This puts the company at more than 5 times book value. While this may seem frothy from a value perspective, one has to compare it to the other U.S. telecoms before judging. The average company in the sector trades for a little over 6 times book, so AT&T is somewhat cheap based on that metric.
As for long term debt, the old Bell has a lot of it. The last quarter’s balance sheet puts it at a staggering 64.7 billion. This amount has gone up from just a hair over 50 billion since the end of 2006. That’s a lot of debt not going in a good direction.
Earnings are for the most part going in the right direction. Analysts have a target of $2.19 for fiscal 2010.
The stock price has spent considerable time above $40, most recently in May of 2008. When it sells off, the market seems to support it around $20. The upside isn’t huge, but is considerable. The downside risk is also quite small. Earnings have been relatively steady for the last few years, meaning the market is willing to put a premium on this stock.
While I don’t think AT&T is a bad buy at these levels, I’m not excited enough about it to rush out and buy it anytime soon. I don’t care for the ugly balance sheet or the amount of debt. A quick look at competitors Verizon or Quest reveals their fortunes are very similar. If I was investing in this sector, I’d probably lean towards an ETF or perhaps a high risk/high reward company like Sprint.