Topic: Growth Stocks

AT&T Inc. $40 – New York symbol T

AT&T INC. $40 (New York symbol T; Income Portfolio, Utilities sector; Shares outstanding: 6.2 billion; Market cap: $248.0 billion; WSSF Rating: Average) provides telecommunication services to over 65.4 million customers in 22 states.

In December 2006, AT&T bought rival phone company BellSouth Corp. for $66.8 billion in stock. That gave it full ownership of AT&T Mobility (formerly Cingular), the largest wireless provider in the United States with more than 62.2 million subscribers.

Thanks to the new operations, income doubled in the first quarter of 2007, to $2.8 billion from $1.4 billion a year earlier. Per-share earnings grew just 21.6%, to $0.45 from $0.37, due to the extra shares outstanding. Due to the timing of the merger, its revenue grew 83.5%, to $29.0 billion from $15.8 billion. If the company had completed the merger at the start of 2005, revenue would have risen just 1.7% in 2006.

AT&T now aims to cut its annual expenses by $5 billion over the next three years, mainly by combining facilities, research and advertising. That will free up cash for stock buybacks.

The company aims to buy back $10 billion worth of its stock by the end of the third quarter.

Having full control over the wireless operation will give AT&T the size it needs to profit in an increasingly competitive industry. It will also make it easier for the company to retain current customers and attract new ones.

AT&T’s wireless business got a boost recently when Apple Inc. selected it as the exclusive carrier for its new iPhone for the next five years.

The iPhone costs more than competing models, but strong consumer interest in it should help AT&T lure customers from other wireless providers. iPhone users must also sign a two-year service contract, which should cut down on defections.

The stock has gained 33% since we first recommended it in September 2006. It now trades at 15.0 times the $2.66 a share it will probably earn in 2007. The $1.42 dividend yields 3.6%.

AT&T is a buy.

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