For the most part, this year’s bull run has been about growth operators. Just look at the standout gains of companies like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX).
In the meantime, many mature companies have greatly lagged. And a prime example is AT&T Inc. (NYSE:T). In fact, the year has been downright horrible. Keep in mind that the return for T stock has come to -17%.
There are certainly reasons for this that go beyond general trends in the equities markets. For example, AT&T is feeling the impact of cord-cutting, as seen with the weakness with DirecTV. Then there has been the Department of Justice’s attempt to block the $85 billion acquisition of Time Warner Inc (NYSE:TWX).
OK then, what should investors do with T stock? Well, I think there is a value opportunity here, especially for those with a long-term view on things. So here’s a look at three reasons why:
T Stock Advantage 1 – Moat
It’s true that the mobile phone business in the U.S. is sluggish. But it is also important to note that — for AT&T — it is a major source of consistent cash flows.
Moreover, the company is the No. 2 player in the industry, which allows for economies of scale. And yes, it would be incredibly difficult for new entrants to make a dent in the market
But AT&T’s network has other leverage points. The company has been able to provide services like cybersecurity, IOT (Internet of Things) and cloud computing for over 3 million businesses. Consider that AT&T has nearly all of the Fortune 1000 as customers.
But AT&T has not rested on its laurels either. The company has continued to invest heavily in its next-generation 5G network, which should allow for more opportunities for monetization. According to InvestorPlace.com’s James Brumley: “(T)hough most wireless telecom players are doing something to stake their claim in the 5G connectivity arena, it’s AT&T that appears to be the most forward-thinking of the bunch. It’s not just installing the proper hardware to make 5G possible. It’s anticipating how businesses and customers will want and need to utilize these high-speed connections, and developing services before would-be customers even realize they have the need.”
T Stock Advantage 2 – Time-Warner Deal
The TWX deal is definitely critical. First of all, T will gain access to a business that generates hefty amounts of cash. This will allow for further investments in 5G as well as provide for dividend payments.
But the TWX acquisition will make T’s network more valuable. TWX has standout assets like HBO, Turner Networks and Warner Bros. Oh, and T’s ownership will also be a hedge against the escalating costs of content.
Then what about the Justice Department’s lawsuit? True, it’s tough to gauge how a court may rule. However, the federal government will have the burden of proof that the deal is anticompetitive. And this will be extremely tough to do. After all, there is little precedent of a court blocking a vertical merger, as these kinds of deals often lead to lower prices and other benefits for consumers.
Besides, in 2011, the federal government allowed a similar deal to go through – that is, Comcast Corporation’s (NASDAQ:CMCSA) purchase of NBCUniversal.
T Stock Advantage 3 – Valuation and Dividend
T stock price is trading at attractive levels, with the forward price-to-earnings multiple of 12X. What’s more, if the TWX deal gets done, there will likely be even more earnings power.
Finally, the dividend yield on the T stock price is also attractive. It’s currently at 5.6%. More importantly, AT&T has a long history of maintaining the payout, as there have been increases for 33 consecutive years.
Tom Taulli is 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.
