Enough With New Smartphones, Data's the Future of AT&T

The highlight of the second quarter is easily AT&T's (NYSE: T  ) wireless business. The increase in profit margin to 30.3% from less than 27% last year was huge. When you factor in that kind of margin improvement with an additional $1 billion in wireless data revenues year over year, the stellar quarter isn't surprising.

AT&T benefited from several areas within the wireless sector, but they all boil down to one thing -- more customers own smartphones than ever before. A full 62% of postpaid subscribers now own smartphones, up from just 50% last year. And if customers already own 'em, AT&T and their competitors don't have to pay to subsidize 'em. The snowball effect from all those existing smartphones has AT&T management and shareholders seeing dollar signs.

What it means
Even beleaguered Sprint Nextel (NYSE: S  ) is gaining some momentum. Sprint's recently announced better-than-expected revenues came from... you guessed it, data plans. The meteoric jump in share price for Sprint is a pretty clear indication that investors expect the wireless revenue trend to continue.

Why? Let's look at AT&T to answer that question. In addition to the aforementioned increase in margins, churn (how fast customers leave) decreased from 1.15% in Q2 of 2011 to a mere 0.97% this past quarter. Once smartphone users find a data plan, they're not likely to change. Both AT&T's and Verizon's (NYSE: VZ  ) recent change in pricing structures are directly related to keeping smartphone and other mobile device users on board.

Signing up users on 4G phones and devices continues to be a concern for AT&T, particularly compared with industry leader Verizon. Along those lines, it was nice to see that more than 30% of the 5.1 million smartphones sold this past quarter have 4G capabilities. The market is shifting toward the faster, (supposedly) more reliable network, and AT&T needs to cement its place.

All of this adds up to a company whose smartphone strategy is coming to fruition. All those subsidized phone sales were great for the likes of Apple, but are just now starting to pay off for the carriers.

The outstanding Q2 makes great wireless news, but is AT&T a buy? At nearly 48 times trailing earnings, higher than even Verizon's steep 44.5 P/E, it's easy to see why some investors would be cautious right now. But don't be -- there's more to this story.

AT&T's 4.8% dividend yield is the highest in the wireless industry, just a notch above Verizon's 4.5%. Unfortunately, no earnings equals no dividend for Sprint shareholders. As for earnings multiples, a look forward gives us an entirely different picture of relative value. At just 14 times projected earnings -- along with the growing wireless data business and that killer dividend -- long-term investors should take a serious look at AT&T.

If you're tired of the lack of interest you're earning at the bank, or maybe you want to boost your portfolio's income-producing holdings, take heart. There's no shortage of dividend options to review in our free special report "Secure Your Future With 9 Rock-Solid Dividend Stocks." Make sure to claim your copy of this report today by clicking here.

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1961494, ~/Articles/ArticleHandler.aspx, 8/29/2014 8:40:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement