Wall Street wasn’t really ringing with approval at AT&T’s (T) so-so second-quarter earnings. The company was expected to report profits of 68 cents per share but wound up a penny shy, and while its $32.1 billion in revenues slightly edged out the consensus mark, investors still drove T shares down 2% by midday Wednesday.
This isn’t a one-time thing, either. AT&T has merely met or fallen under the Street’s expectations for the past three quarters. Meanwhile, its stock has been equally as sluggish, with T shares up only 4% vs. a nearly 18% gain for the S&P 500.
So should you buy AT&T, with the recent weakness presenting a nice dip, or is this kind of flat performance just not worth dealing with? To see, we’ll look at the pros and cons:
Mobile Leader: AT&T has made a smooth transition ever since losing exclusivity on Apple’s (AAPL) iPhone, gaining new subscribers as well as maintaining existing ones. In the latest quarter, wireless data revenues jumped by 20% to $5.4 billion and the company snagged 1.2 million new smartphone subscribers (88% were postpaid sales and nearly 70% took usage-based plans). It helps that AT&T continues to invest heavily in customer service and the network; in fact, the rollout of LTE is ahead of schedule. By the end of the year, there will be coverage in more than 270 million points of presence, and most of the coverage will be complete by summer 2014.
U-verse: All in all, performance at AT&T’s high-speed broadband, video and voice services division has been strong — especially on the broadband side. In Q2, the company signed over 641,000 new subscribers to hit a total U-verse base of about 9.4 million. But the TV segment also had a nice performance, snapping up 233,000 subscribers. U-Verse is a testament to AT&T’s capabilities — the business went from nothing to $12 billion in revenues in a seven-year period.
Dividend: AT&T regularly holds the No. 1 spot of our Top 10 Dow Dividend Stocks feature. The company has increased its quarterly dividend for 29 consecutive years, and its current yield is now north of 5%. That’s because AT&T generates oodles of operating cash flows, which this year have amounted to $17.7 billion.
Competition: AT&T’s main rival is its duopoly brother, Verizon (VZ). Both have spent years in a slugfest to gain market share … but other players might gain some headway, too. Japan’s Softbank (SFTBF) invested $21.6 billion into Sprint (S), plus the company has been aggressive with its unlimited data plans. AT&T has tried to fight back with its own dealmaking, such as a recent $1.2 billion offer for Leap Wireless (LEAP), but the company is limited, and federal antitrust laws will make it nearly impossible to pull off a truly transformative acquisition. See: AT&T’s dropped $39 billion bid for T-Mobile US (TMUS).
Benefits: AT&T has granted lucrative retirement compensation arrangements like pensions and healthcare coverage for decades, but they’re far from cheap. In the pension plan alone, overall outstanding obligations reached $57 billion in 2012, up from $53.6 billion in the same period a year before. With the baby boomers expected to retire in droves, it could result in long-term pressure on earnings.
Phone Subsidies: Handset operators like Apple and Samsung (SSNLF) have required upfront subsidies for new phone sales, which cut into margins. To deal with this, AT&T (as well as other carriers) are unrolling a new program that allows for a phone upgrade after only one year — without an activation fee, upgrade fee or finance fee — with the initial purchase of a phone, with payments instead made on an installment basis. It’s an interesting plan, but it’s far from clear whether consumers will take advantage of it.
In the wireless world, scale is vital. Users want reliable, fast access anywhere, and that gives AT&T has a huge advantage.
But the U-verse business will also be a nice driver, as will another often overlooked area: the cloud. AT&T is leveraging its platform — which includes 38 datacenters across the world — to help businesses with mission-critical services. As seen with Amazon.com (AMZN), this can be a lucrative category.
AT&T is nicely positioned to benefit from several major long-term trends, and also has an extremely shareholder-friendly way of dealing with its cash flows.
So should you buy AT&T? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.