AT&T Is Booming Across the Board

AT&T (NYSE: T  ) post another beat on earnings last quarter thanks largely to the usual culprit: iPhone sales once again boomed for the company. However, with the threat of Verizon's (NYSE: VZ  ) possibly scooping up the iPhone always hanging over its wireless segment, strength in the company's wireline business provided an unexpected reason to cheer.

The company's Investor Briefing that accompanied earnings made it clear that AT&T's wireless is driving the future. Aside from the usual top level financial measures, every bullet point focused on success in the wireless market. Overall, business was good; excluding a one-time gain, the company saw profits rise 13% over last year on largely flat revenue. Growth in data is helping lead the charge, as the company grew data users 11% just since last quarter. Overall, wireless data revenue was up 27% from the year-ago quarter.

Oh yeah, AT&T also activated 3.2 million Apple's (Nasdaq: AAPL  ) iPhones during the quarter. That might help explain the data boom.

However, encouraging news was also seen on the landline front. In a segment that's perpetually shrinking, you take what good news you can get. In this case, revenue saw its smallest drop since the first quarter of 2008, down only 3.7%. While landline increasingly comprises a smaller amount of AT&T's profit pie, it's an important segment. The consistent cash flow that comes in from legacy telephony services is what helps AT&T pay its attractive dividend.

In recent years, the segment has reoriented around offering fiber services through its U-Verse brand. This presents a growth opportunity for the segment, as U-Verse video connections were up 59% over last year, but it's not without its risks. The cost of building out a fiber network is extremely high, but its speed presents growth opportunities. Verizon is pursuing a similar strategy. Last year it divested a large chunk of rural assets to Frontier Communications (NYSE: FTR  ) in order to concentrate around urban areas where it offers its own FiOS fiber service.

The situation has created an interesting dynamic. AT&T and Verizon are either divesting legacy voice assets, or letting them deteriorate at rapid levels. AT&T's wireline voice business was down 13% from last year. Their strategy is to offer high dividends, but the potential growth and share price appreciation through growth initiatives in wireless and new high-tech landline offerings.

On the flip side, there are a growing number of smaller rural telecom providers taking the opposite strategy. These companies are focused on minimizing costs, decreasing churn as much as possible, and providing legacy phone service to rural customers less likely to cancel service. They don't offer much growth potential, but they're paying out cash in massive dividends. Aside from Frontier, CenturyLink (NYSE: CTL  ) , and Windstream (Nasdaq: WIN  ) also fit the profile.

Company

Dividend Yield

Forward Growth Estimate

Frontier

10.2%

1.5%

CenturyLink

8.2%

0.5%

Windstream

8.9%

(1%)

Source: Yahoo! Finance. Dividend yield is for forward 12 months.

If you're an investor looking to AT&T for its dividend, these three companies might be worth a nibble as well. Thanks to its massive acquisition, Frontier is probably the least safe but also offers better bottom line growth potential.

However, if you're buying AT&T for not only solid dividends, but the growth potential wireless provides, this quarter was music to your ears. Verizon and AT&T continue moving toward being a virtual duopoly atop the wireless industry, outpacing smaller rivals T-Mobile and Sprint (NYSE: S  ) . Fears of price battles taking their toll on profits have yet to materialize, and data revenues are a boon to profits.

These are Halcyon Days for the Big Two of telecom. If you're an AT&T investor, enjoy the feast while it lasts.

Eric Bleeker owns shares of no companies listed above. Sprint Nextel is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (15)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2010, at 10:15 AM, conradsands wrote:

    In a poll that asked 4,040 smartphone users in March how many dropped calls they had experienced in the past three months, AT&T — the exclusive U.S. carrier of Apple's iPhone and iPad mobile devices — came in dead last among the country's four largest carriers.

  • Report this Comment On July 24, 2010, at 10:20 AM, conradsands wrote:

    Headed toward a duopoly in wireless -- with that we can all fear higher prices and slow innovation.

    Already Verizon and AT&T give us the most expensive wireless calling plans in America.

    Wireless Profit Margins from early 2010 --

    Verizon Wireless = 45 percent

    AT&T = 39 percent

    Now we know where Verizon (the 14th leading U.S. lobbyist) and AT&T (the 7th leading U.S. lobbyist) get all that money to run commercials 24x7, pay out huge “fat cat” executive bonuses and hire armies of lawyers and lobbyists -- the American consumer. Sadly, there's little doubt that big money and lobbying help drive them toward a duopoly.

  • Report this Comment On July 24, 2010, at 11:53 PM, jm7700229 wrote:

    Whine all you want, I own both stocks but have my cell phones with a low price carrier. I use the excess profits (and dividends) to assuage my fury (hee hee) over their profit margins.

  • Report this Comment On July 25, 2010, at 1:26 PM, RHinCT wrote:

    "If you're an AT&T investor, enjoy the feast while it lasts."

    While it lasts is right! The rumor that Apple will cut the iPhones loose from AT&T is growing stronger all the time. When the happens the impact on AT&T could be pretty severe.

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