Welcome to the Stock of the Day!
An aggressive stock buyback program in the works? A 5.0% dividend yield? New mergers announced by the month? What isn’t to like about AT&T (T)?
Well, in today’s Stock of the Day I reveal how AT&T needs to “raise the bar” before it gets a buy recommendation from me.
AT&T is the telecom titan that can trace its roots back to Alexander Graham Bell and the Bell Telephone Company. For nearly a hundred years, AT&T enjoyed a monopoly over phone service in the U.S. And while the government forced a breakup of the company in 1984, AT&T still remains a market leader to this day. Out of the 24 telecom services companies, AT&T ranks first for market cap, sixth for earnings growth and seventh for both long-term growth rate and its 5.0% annual dividend yield.
Looking ahead to its fourth-quarter earnings announcement, which is due out at the end of January, it’s shaping up to be a slightly stronger report than past quarters. Currently, analysts expect just 1.4% annual sales growth but 13.6% earnings growth. Sales are expected to accelerate slightly through the end of 2014 as the telecom sector heats up.
And AT&T is working overtime to capture a bigger piece of the pie with its billion-dollar merger with Leap Wireless (LEAP). AT&T is also exploring the possibility of buying out the U.K.’s Vodafone (VOD), a merger that would create the world’s largest telecommunications operator by sales.
AT&T also recently expanded its 4G LTE network as part of a $21 billion capital expenditure program for 2013. But it will take a few years for the company to see a real return on these investments, so I can’t ignore its lackluster current fundamentals, which I’ll discuss next.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This Conservative stock maintained a buy rating in my screens for the first several months of 2013. But over the summer, the stock sustained a steep dropoff in institutional buying pressure, sending the stock down into sell territory.
T currently receives a D-rating for its Quantitative Grade. Meanwhile, the company could stand to improve its financial statements: Sales growth, earnings surprises, cash flow and return on equity are all C- or D-rated. AT&T receives a C for its Fundamental Grade.
As of this post on November 21, I consider T a D-rated sell. With its aggressive capital expenditure program, its hefty share repurchase plan and its generous dividend, the stock could very well bounce back, but for now I want to play it safe.
Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!