AT&T (NYSE:T) saw some volatility earlier this month after its petition begging the FTC to drop a fraudulent billing lawsuit was turned down. That little misstep helped continue a mostly lackluster year for AT&T stock, which is down 2% for the year to date.
But it’s a minor issue to a high-quality company like AT&T, which still looks like an attractive buy amid its major network improvements, increasingly diversified business and sweet dividend yield.
AT&T and DirecTV Deal: A New U-Verse
AT&T paid a steep $4 billion to T-Mobile US Inc (NYSE:TMUS) for M&A activity — but that was just the payout from the merger falling apart. Now it’s back in the M&A game, making its biggest purchase since 2006 ($85 billion for BellSouth) with its acquisition of DirecTV (NASDAQ:DTV).
The upside of the DTV merger?
Well, for one, if it does fall through, AT&T won’t have to pay through the nose. Most importantly, though, AT&T projects post-merger cost savings in the ballpark of $1.6 billion annually, and synergies should allow it to bring high-speed Internet to some 15 million rural homes, to boot.
AT&T currently offers its U-Verse service in 21 states from $59 to $109, but a DTV deal, according to DirecTV CEO Michael White, would spur competition, resulting in lower-priced bundles of AT&T and DirecTV services from downward pricing, while AT&T’s video business would allow DTV to invest in increasing the speed of its broadband network and make it the more attractive option for consumers and small businesses.
AT&T Launches GigaPower in Cupertino
AT&T recently launched GigaPower in the backyard of Apple Inc. (NASDAQ:AAPL), picking up where Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) left off. Cupertino is now recipient to the first super-high-speed network in California.
AT&T’s service boasts speeds of 1 gigabit per second, or about 7 times faster than the broadband offered by Comcast Corporation (NASDAQ:CMCSA), reducing download times of high-definition movies to less than 40 seconds.
AT&T pumps these fiber optic cables into its customers’ houses at $110 a month for Internet and $180 for Internet, unlimited voice and pay TV. Not only is this more than the cost of the same service in other states (where GOOG does offer its fiber optic service), but AT&T’s customers must submit to the tracking of their online activity, allowing AT&T to monitor service performance while simultaneously marketing products right back to its customers on a personalized basis.
The World Economic Forum dubbed personal data a new asset class in 2011, claiming it could be among the most valuable resources in the 21st century as more than 50 billion devices are connected to the internet by 2020. Personal data includes information about demographics, income, surfing habits and location to form a coherent picture of the lifestyle and trends of users. All the better to sell products to users.
Customers can avoid tracking, but AT&T charges an additional $29 a month for opting out.
Either way, AT&T is in a win-win situation when it comes to your data.
AT&T Eyes SMB Enterprise
The small- to mid-sized business (SMB) market is estimated to grow to as large as $30 billion over the next few years, and AT&T is one of many telecom operators looking to mine gold from those SMB streams.
Enter the AT&T WiFi-Small Site service.
This service gives enterprise its own dedicated access point as well as provides a completely separate, public WiFi connection for free to customers. Just like AT&T’s GigaPower service, WiFi Small Site allows companies to collect data on which sites their customers visit and their browsing habits. The ability to harness personal data from consumers is an advantage many SMBs will seek out to compete with larger enterprises.
AT&T charges $30 a month for non-AT&T broadband users, but cheaper price points for companies subscribed to its services, such as U-Verse high-speed Internet, which grew by 405,000 users in 2014. While growth in the worldwide WLAN market slowed a bit, the IDC notes enterprise WLAN market grew by 7.4% YoY in the fourth quarter of 2014. T stands to gain from continued growth in this segment, especially in emerging markets like Latin America, which experienced over 14% growth in Q4 2014.
AT&T isn’t alone, of course. T-Mobile, Sprint Corp (NYSE:S) and Verizon Communications Inc. (NYSE:VZ) are all vying for a piece of the SMB pie. There’s plenty of it to go around, though.
Depend on the Dividends
Of course, AT&T’s large dividend remains one of the best reasons to buy T stock.
AT&T is a lot of things, and as it diversifies, it’ll continue growing its presence in various markets, such as TV. But at the end of the day, it throws off a massive 5.7%, and still is one of the safest high-yield stocks you can buy.
Yes, AT&T’s dividend growth is nothing exceptional — AT&T’s payout has grown just 7% over the past three years — but the company has improved its dividend for 58 consecutive years, easily putting it among the ranks of dependable dividend stocks.
Moreover, based on that high dividend and even its modest growth rate, using the Gordon Growth model, AT&T has an intrinsic value of $41 — some 25% higher than where it trades today.
AT&T reports earnings on April 22, so obviously we could see some wiggle depending on how Wall Street views the company’s most recent numbers. But AT&T’s maneuvers and its large dividend make it an attractive long-term holding regardless of any short-term volatility.
As of this writing, John Kilhefner did not hold a position in any of the aforementioned securities.
