The S&P 500 and Dow Jones have fallen 8% in the first two weeks of 2016. Clearly, investors are worried about the effects of low oil prices, the turmoil in Chinese equity markets and what effect higher interest rates may have on the economy.
Yet despite this complete breakdown in U.S. equity markets, AT&T Inc. (T) has about held even.
There are five reasons why AT&T stock is outperforming the market, and why it will continue to do so throughout 2016.
The Basics
AT&T stock has always been viewed as a safe haven in down markets. It has a dividend yield of 5.6%, and when markets fall, investors are attracted to high yields.
It also has a beta of just 0.46, which means it is historically 46% as volatile as the market. When you put these two things together, it is no surprise that investors are gravitating towards AT&T stock.
Diversification
Based on “the basics,” one could conclude that all telecom stocks have performed well this year. However, that’s not true. Verizon Communications Inc. (VZ) has fallen 2.4%, CenturyLink Inc (CTL) is down more than 7% and Sprint Corp (S) has been one of the worst tech performers this year with its 26% loss.
What makes AT&T special is in fact its diversification. Over the last few years VZ has become more of a U.S. wireless company whereas AT&T is not only a U.S. wireless company of comparable size, but also is in wireline and TV in markets outside the U.S. This diversification provides an added layer of protection that investors so desperately seek in down markets.
Profits Galore
When AT&T purchased DirecTV, it gained a cash cow. And when AT&T completed the network infrastructure upgrades associated with Project VIP, it saved billions of dollars annually in capital expenditures. When you put it all together, AT&T’s free cash flow soared $2 billion year-over-year to $5.5 billion during its last quarter.
Also, AT&T guided that free cash flow should top $15 billion in 2015, a 50% increase from 2014 and a whopping $2 billion more than AT&T had initially expected after buying DirecTV for the full year. This means more cash for dividends, buybacks, investments and paying off debt.
And what’s best of all, AT&T does not expect to realize peak synergies from the DirecTV merger for another two years, implying free cash flow growth both this year and next.
These are all things that investors like to hear.
Valuation
Investors not only want to own high-yield, low-beta, profitable companies during down markets, but also cheap stocks. Thankfully, AT&T stock is very cheap.
Based on last year’s expected free cash flow, AT&T stock trades at less than 14 times FY2015 FCF. If AT&T can grow FCF by just $1 billion this year, then it will trade with a multiple of only 13. This, coupled with AT&T stock trading at just 12 times FY2016 expected EPS, is certainly adding to the reasons why investors are buying T stock.
Growth
While it may be evident that AT&T is going to perform well in a down market, the good news is that it has the growth to outperform even if the market turns higher. This makes AT&T stock the ultimate investment for 2016.
In looking at analyst expectations, AT&T grew revenue 11.9% last year and will grow 14.5% in 2016. While much of this growth is acquired, AT&T has a great opportunity to produce rapid organic growth from its existing businesses.
Currently, AT&T’s U-Verse controls less than 15% of the 100 million U.S. household market. However, with its high-speed broadband service, GigaPower, moving into 56 markets, AT&T has a great shot to significantly grow its share.
Keep in mind, this is a $15 billion or more business for AT&T, growing 20% annually. Thus, it could be a real growth driver long-term.
Beyond that, AT&T now has a wireless network that covers 400 million consumers across the U.S. and Mexico, 100 million more than Verizon’s network, and spectrum assets in Latin America that will allow AT&T to build a broadband network that covers 50 million consumers or more. These are huge growth catalysts, as is AT&T’s recently announced Internet of Things initiatives, which could create many billions of unexpected dollars over the next couple years.
With that said, fast-growing technology companies are the first to appreciate when markets turn higher, and AT&T is a rare company that has all the components of a stock to buy in any market climate.
Thus, AT&T stock is a must own for 2016, and beyond.
As of this writing, Brian Nichols was long T stock.
