AT&T’s $48.5 billion acquisition of DirecTV has already lifted earnings and share price. It should also create new opportunities to sell premium products.

AT&T INC. (New York symbol T; www.att.com) is the largest wireless provider in the U.S., with 130.4 million subscribers. It also has 9.2 million wireless users in Mexico.

In addition, the company sells traditional phone services, television packages and high-speed Internet access to 51.7 million customers in the U.S.

Satellite purchase opened new markets

In July 2015, AT&T acquired DirecTV for $48.5 billion (70% stock and 30% cash). This business has 20.1 million satellite TV customers in the U.S., and 12.4 million in Latin America. DirecTV also owns regional sports networks and other cable channels.

Thanks to this purchase, revenue rose 15.8%, from $126.7 billion in 2011 to $146.8 billion in 2015.

Earnings increased 4.5%, from $13.1 billion in 2011 to $13.7 billion in 2012. Due to fewer shares outstanding, earnings per share gained 5.9%, from $2.20 to $2.33. Overall earnings then fell to $13.5 billion (or $2.50 a share) in 2013, and to $13.1 billion ($2.50 a share) in 2014. However, earnings improved to $15.2 billion (or $2.69 a share) in 2015; without unusual items, the company earned $2.71 a share.

In the three months ended March 31, 2016, AT&T’s revenue rose 24.4%, to $40.5 billion from $32.6 billion a year earlier. Earnings gained 16.5%, to $3.8 billion from $3.3 billion. Due to more shares outstanding, per-share earnings fell 3.2%, to $0.61 from $0.63.

Value Stocks: Earnings per share rise 10.8%

However, if you exclude unusual costs, earnings per share jumped 10.8%, to $0.72 from $0.65.

AT&T aims to attract new users with special bundles that include unlimited wireless service when they sign up for its satellite or Internet TV services.

Video bundles spur mobile growth

The strategy is working. AT&T added 1.8 million new wireless subscribers (net of cancellations) in the U.S. during the latest quarter. As well, the average monthly revenue per user rose 5.1%.

The company also expects the elimination of overlapping operations will cut its annual costs by $1.5 billion. These savings will help AT&T pay down the extra debt it took on to buy DirecTV. As of March 31, 2016, its long-term debt of $122.1 billion was a high, but still manageable, 48% of its market cap. The company also held cash of $10.0 billion.

AT&T’s sound balance sheet will also support its plan to spend $22 billion on its networks in 2016. These improvements will help it cope as more of its wireless customers watch and share videos on their smartphones. In addition, the company is developing a new Internet video-streaming service under the Direc- TV brand. That should help it compete with Netflix and similar video services.

Still attractive in relation to earnings

The stock has gained 22% since the DirecTV purchase. Even so, it trades at a moderate 14.3 times its likely 2016 earnings of $2.86 a share. The $1.92 dividend yields 4.7%.

Recommendation in Wall Street Stock Forecaster: BUY

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