I know what you’re thinking. AT&T Inc. (NYSE:T) is definitely not cheap at well over 25 times earnings. I would certainly disagree, however, and I also think that the company has a lot of other things going for it that make its shares look attractive at current levels. Let me further explain.
First of all, valuations…
| P/E | Forward P/E | Dividend (Yield) | Payout Ratio | |
|---|---|---|---|---|
| T | 26.66 | 12.81 | $1.80 (5.22%) | 139% |
| VZ | 124.11 | 15.33 | $2.06 (4.00%) | 515% |
While the first thing I will point out is that AT&T Inc. (NYSE:T) is way cheaper in relation to earnings than its competitor Verizon Communications Inc. (NYSE:VZ), you may point out the absurdly high P/E ratios and the unsustainable payout ratios for both companies. Here’s why none of this may matter going forward.
Both companies took massive hits to their earnings after being smacked by one-time items caused by a double whammy of pesky pension problems and damage done by Hurricane Sandy. Looking at earnings estimates going forward (which give us a more normalized view) we can see that the forward P/E ratio looks fair for Verizon Communications Inc. (NYSE:VZ), with AT&T Inc. (NYSE:T) actually looking a little cheap at a under 13 times forward earnings. Payout ratios also look more than sustainable with forward earnings in mind as well.
Another thing to keep in mind before absorbing all the doom-and-gloom surrounding these wireless companies is the fact that both generate massive amounts of free cash flow as well, which adds to their strength:
To sum it up, while nothing is guaranteed, the darker days for both companies may be behind them.
And then there are the benefits of being a near duopoly…
In the United States, Verizon Communications Inc. (NYSE:VZ) and AT&T serve 65% ofmobile subscribers. Since 2009, while Sprint Nextel Corporation (NYSE:S) has lost 5 million subscribers, Verizon has added 15 million and AT&T Inc. (NYSE:T) has added 8 million. With big market share comes big power–especially when you need to better your bottom line.
Apparently the nation’s two largest wireless carriers are looking to alleviate the pressure on earnings by silently shifting it onto the shoulders of consumers. After recently experiencing a 60% year-over-year decrease in new connections, both companies seem to see new fees as the savior to increasing profits.
AT&T recently began charging a $0.61 “Mobility Administrative Fee” for instance, which according to the Huffington Post, will add up to an additional $775 million annually. The company, along with competitor Verizon, also increased its upgrade fees last year as well. With a duopoly in place and other competitors not even close to the size and scope of Verizon and AT&T Inc. (NYSE:T), both companies can get away with fees and increases–for now. This adds to their pricing power and ability to remain profitable.
So what does AT&T have going for it that Verizon does not?
Besides a cheaper price relative to forward earnings and a much higher dividend, AT&T has other attributes that separate it from the only other competitor that comes close to it in size. One of these other advantages is its relationship with America Movil SAB de CV (ADR) (NYSE:AMX).
AT&T owns and maintains a 9% stake in the Mexican telecommunications company, even after recently selling off a chunk of shares and raising $564 million from the proceeds. AT&T clarified the selling of shares in an email to Bloomberg, explaining that:
“From time to time we rebalance our asset levels and raise cash for general corporate purposes… We’ve historically owned about 9 percent of AMX. As a result of AMX’s recent share repurchases and our sales, we will again hold an approximate 9 percent interest in AMX.”
Carlos Slim, often touted as the world’s richest man, is the largest stakeholder in the company, holding roughly 30%, and in 1990 AT&T (then known as Southwestern Bell Corp.) backed Slim in a privatization purchase of the state-owned company. The stake in America Movil is a very valuable asset for AT&T Inc. (NYSE:T), as can be seen with the half-billion cash injection that it recently provided the company.
