Why AT&T Didn't Impress the Market Today

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) swayed between slight losses and slight gains today after economic data showed neither bullish or bearish leanings. A report from ADP found that the U.S. economy added 179,000 private-sector jobs in May, the fewest since January but nothing surprising given the tepid economic recovery. The Federal Reserve's Beige Book also said that most regions of the country are growing at a "moderate" and "modest" pace, which is not likely to change monetary policy in the near future.  

Without much of a catalyst to drive stocks, the Dow Jones Industrial Average was up just 0.07% late in the day, held back in part by AT&T's (NYSE: T  )  0.7% drop

AT&T can't seem to impress investors
It seems like nothing AT&T does pleases investors. The market shrugged at word of the telecom's plants to acquire satellite TV company DIRECTV, and shares actually fell once the deal was officially announced.

AT&T stores have been busy signing up new customers.

Today's move was particularly interesting because AT&T said on Tuesday it expects to add 800,000 subscribers in the second quarter, which would be the biggest gain since the fourth quarter of 2009. But discounts intended to make AT&T more competitive with smaller rivals T-Mobile and Sprint won't result in the increased profit investors had hoped.  

Management said in an earnings guidance update it now expects 2014 revenue to rise about 5%, higher than previously expected, but margins are expected to be flat and earnings-per-share guidance stayed the same at the low end of the middle single-digit range.

When going after growth, companies will often give up profits to attract customers, and on a per-customer basis that's what AT&T appears to be doing. But keep in mind that the company still expects to generate about $11 billion in free cash flow this year, so this is far from a business that's in trouble.

Stepping back further, we see that the stock is trading at just 12.6 times this year's expected earnings, and investors are rewarded with a 5.2% dividend yield as well. The market might not be cheering the DIRECTV deal or AT&T discounting to gain customers, but long-term investors who buy on this dip get a company that has consistent cash flow and is a top-two player in a market in which high capital expenditures are required just to compete. That provides a strong competitive moat for a long-lasting business.

Don't worry about the noise surrounding one quarter or even the DIRECTV deal. If you're looking for a solid dividend stock, this should be on the top of your list.

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  • Report this Comment On June 04, 2014, at 4:29 PM, 092326 wrote:

    I believe that T would be a more appropriate buy in the 30 to 32 range. It is basically a bond surrogate.

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