Has AT&T Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if AT&T (NYSE: T  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at AT&T.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

4%

Fail

 

1-Year Revenue Growth > 12%

1.4%

Fail

Margins

Gross Margin > 35%

55.1%

Pass

 

Net Margin > 15%

3.5%

Fail

Balance Sheet

Debt to Equity < 50%

62.9%

Fail

 

Current Ratio > 1.3

0.62

Fail

Opportunities

Return on Equity > 15%

4.4%

Fail

Valuation

Normalized P/E < 20

23.53

Fail

Dividends

Current Yield > 2%

5.1%

Pass

 

5-Year Dividend Growth > 10%

4.6%

Fail

       
 

Total Score

 

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AT&T last year, the company has dropped two more points, bringing its total loss since 2010 to four points. Earnings multiples soared as revenue growth slowed again, but the stock hasn't suffered at all, gaining 25% over the past year.

The big news affecting AT&T since last year was the scuttling of its proposed merger with T-Mobile. With the likelihood of extensive litigation on antitrust concerns from the Justice Department and FCC, AT&T took a painful $4 billion charge to pay a breakup fee to T-Mobile parent Deutsche Telekom.

Still, that experience didn't stop the stock from soaring. Despite extensive competition from Verizon (NYSE: VZ  ) , which sports a big advantage in 4G LTE coverage, AT&T is riding the wave of smartphone-led demand for upper-end data plans. AT&T also joined Verizon by offering a shared data plan, which should also help the company boost its overall revenue.

New competition could pose a big threat to AT&T. With Japan's SoftBank agreeing to take a 70% stake in Sprint (NYSE: S  ) , Sprint will have more resources to deal with its larger rivals. That could hit AT&T in a number of ways, including giving cell-tower company American Tower (NYSE: AMT  ) more leverage in demanding higher prices for leasing tower space. Specifically, if the Sprint move leads to it spending more to build out its advanced 4G network, then American Tower and its peers will likely build more towers, forcing AT&T to lease space on them in order to avoid falling behind. T-Mobile's purchase of MetroPCS (NYSE: PCS  ) will also have competitive impacts for AT&T.

In its most recent quarter, AT&T had mixed results, with analysts having trouble deciding whether the news was good or bad. Revenue fell, but the company activated 4.7 million iPhones, more than Verizon.

For AT&T to improve, it needs to get sales moving forward more aggressively and ride its higher-price data plans to bigger profits. If it can't accomplish that feat even with hot products like the iPhone 5, it calls into question whether AT&T will ever get much closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Click here to add AT&T to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend American Tower and AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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