8 Reasons to Buy AT&T Stock After Earnings

AT&T (T) stock jumped 2% after the company released its first earnings report since acquiring DirecTV and two Mexican wireless carriers. Unlike previous quarters, wireless net subscriber additions were not the focal point, but rather a laundry list of data points that suggest much better days ahead.

Let’s look at eight key points from AT&T earnings you need to know.

Revenue jumped 19% to $39.1 billion. The majority of this growth was a result of AT&T’s three acquisitions, mainly DirecTV. AT&T had two full months that included DirecTV in its last quarter.

Free cash flow soared to $5.5 billion. This is simply amazing, about $2 billion better than last year and much higher than the $4.5 billion that the company and analysts expected. One reason for the big gain is a 250 basis point increase to its operating margin, now 20.3%.

AT&T expects free cash flow of $15 billion or more this year. That’s far better than the $9.9 billion in free cash flow it earned last year, and $2 billion more than AT&T’s previous guidance for the full year. What’s really amazing is that AT&T will achieve this profit with only five months of owning DirecTV, which created $3 billion in FCF last year.

Further, the $2.5 billion in cost reductions that AT&T expects from the DirecTV acquisition won’t go into full effect for another two years. Thus, AT&T stock proved just how profitable it will become.

AT&T’s Entertainment & Internet Services revenue doubled with the addition of DirecTV. This is now a $50-billion-per-year business. On top of this explosive growth, its margin is expanding. AT&T noted an 830 basis point increase to its EBITDA margin to 22.2%.

AT&T is helping DirecTV grow. Prior to AT&T’s acquisition, DirecTV was struggling to find new subscribers in a mature market. However, AT&T added 26,000 new DirecTV customers in just two months since closing the deal. This proves that the promotions and synergies between the two services are beneficial.

U-Verse growth is still on fire. AT&T earnings showed strength in so many key areas that its 192,000 net adds in IP broadband went unnoticed. U-Verse continues to grow at a double-digit pace, impressive given the fact that DirecTV is gaining many of the subscribers who would otherwise use U-Verse video services.

Another million connected car subscribers. AT&T is playing a big role in connecting vehicles to its mobile network. In the second quarter it added a whopping one million connected car subscribers, and then another one million in the third quarter. This new service is one way that AT&T gets more things connected to its network, collecting higher fees by pushing subscribers into larger data packages.

Last but not least, AT&T free cash flow dividend payout ratio in the first nine months of 2015 is 57%. This compares to a whopping 84% at the same period last year. Free cash flow gains in recent months have made its dividend much more affordable, with AT&T stock now paying a 5.5% yield. Given the affordability of this dividend, don’t be surprised if AT&T hikes its dividend in the coming quarter(s).

Speaking of free cash flow, AT&T stock now trades at just 13.7 times this year’s expected free cash flow. That’s a stock multiple that will likely decline as capital expenditures decline, cost synergies are created, new businesses fully implemented, and free cash flow ultimately increases further.

With T boasting a great dividend, too, now looks like the perfect time to get long AT&T stock.

As of this writing, Brian Nichols owned shares of AT&T stock.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/8-reasons-buy-att-stock-earnings/.

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