AT&T INC. $35 (New York symbol T; Conservative Growth and Income Portfolios, Utilities sector; Shares outstanding: 5.2 billion; Market cap: $182.0 billion; Price-to-sales ratio: 1.4; Dividend yield: 5.3%; TSINetwork Rating: Average; www.att.com) is the largest wireless service provider in the U.S., with 116.6 million subscribers. This business supplies 55% of the company’s revenue and 75% of its earnings.

The remaining 45% of revenue and 25% of earnings comes from its wireline division, which sells phone services, television packages and high-speed Internet access to 35.9 million customers. AT&T’s overall revenue rose 4.7%, from $123.0 billion in 2009 to $128.8 billion in 2013.

Earnings gained 8.6%, from $12.5 billion in 2009 to $13.6 billion in 2010. Earnings per share rose at a slower pace of 8.0%, from $2.12 to $2.29, on more shares outstanding.

Like most wireless carriers, AT&T subsidizes its mobile phones to entice customers to sign long-term service contracts. Higher subsidies cut its 2011 earnings to $2.20 a share (or a total of $13.1 billion).

However, strong demand for wireless and highspeed Internet pushed up AT&T’s 2012 earnings to $2.33 a share (or $13.7 billion). Its earnings dipped to $13.5 billion in 2013, but per-share earnings rose to $2.50 on fewer shares outstanding.

AT&T tried to buy rival wireless carrier T-Mobile in 2011, but U.S. anti-trust regulators blocked the deal. However, they did approve the company’s March 2014 purchase of Leap Wireless, which serves 4.6 million subscribers under the Cricket brand. The company paid $1.25 billion for Leap.

Innovative plans keep customers loyal

In the quarter ended June 30, 2014, AT&T added 634,000 new wireless subscribers, net of cancellations, up 0.3% from 632,000 a year earlier.

In addition to the new Leap subscribers, the company continues to benefit from its Next plan, which lets users upgrade their phones early. AT&T’s Mobile Share plan, which lets family members share wireless minutes and data, is also helping the company attract new customers.

Meanwhile, AT&T continues to see strong demand for its U-verse service, which uses high-speed fibre optic technology to deliver a package of services, including phone, Internet and TV. The company had 5.85 million U-verse TV subscribers on June 30, 2014, up 17.0% from 5.0 million a year earlier.

AT&T continues to expand its TV services. In May 2014, it agreed to acquire DirecTV (Nasdaq symbol DTV), which has 20.3 million satellite TV customers in the U.S. and 18.1 million in Latin America. DirecTV also owns regional sports networks and other cable channels.

The company will pay $48.5 billion (70% stock and 30% cash) when the deal closes in mid-2015. If you include DirecTV’s debt, the agreement is worth $67.1 billion. Following the purchase, DirecTV investors will own 15% of the combined company.

AT&T recently sold its remaining shares in Mexico’s main telephone firm for $5.6 billion, which will help pay for this purchase. Moreover, it expects annual savings of $1.6 billion by the end of the third year, mainly by merging overlapping functions.

Network upgrades moving ahead

As of June 30, 2014, the company held cash of $11.3 billion, and its long-term debt was $73.6 billion. Buying DirecTV will push up its debt to around $99.7 billion, or a high 55% of its market cap. But interest rates are low, and the extra cash flow from DirecTV will help AT&T quickly pay back these loans.

As well, AT&T’s cash flow should more than cover its plan to spend $21 billion on network upgrades this year, plus a further $21 billion in 2015.

Much of this spending will go toward expanding the company’s 4G long-term evolution (LTE) wireless service to cover 300 million people in the U.S. by the end of 2014. LTE networks are up to five times faster than those in use today.

At the same time, the company is building fibre optic networks that are 100 times faster than regular broadband systems. AT&T will only offer these services in cities where it feels demand is strong enough to cover the cost of installing new cables, but it should help the company compete with Google, which is building ultrafast networks in 34 U.S. cities.

Cash flow supports high dividend

Even with these high costs, AT&T’s $1.84-a-share dividend, which yields 5.3%, still seems safe. The company’s current operations should provide it with cash flow of $11.4 billion in 2014, after paying for capital upgrades. That would easily cover its total dividend payout of $9.5 billion.

The stock is down 5% since the company announced the DirecTV acquisition, as big acquisitions like this always come with hidden risks. Still, the stock is attractive at just 13.1 times AT&T’s projected 2014 earnings of $2.68 a share.

AT&T is a buy.