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.
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