Relied Upon for Its Dividend, Could AT&T Inc. Now Be a Growth Stock, Too?

Telecom giant AT&T (NYSE: T  ) has a lot working in its favor. While a stodgy company with a roughly $182 billion market capitalization might not seem exciting to you, AT&T has more going for it than first meets the eye. The company is looking forward to strong growth this year, thanks to continued growth in its wireless segment and benefits from the planned acquisition of DirecTV (NASDAQ: DTV  ) .

To reflect management's optimism, AT&T recently increased its revenue growth target for this year. If it hits its goal, AT&T will generate far greater revenue growth than last year.

Add it all up, and what was typically a slow-growth company might just be a growth story.

A slew of catalysts behind AT&T
First and foremost, investors should expect growth as a result of AT&T's huge acquisition of DirecTV. AT&T announced it will acquire the pay-TV provider in a massive transaction valued at $67.1 billion, including debt. The deal will result in immediate benefits for AT&T, including millions of subscribers. In fact, AT&T will instantly boost its presence in video by adding DirecTV's 38 million subscribers in the U.S. and Latin America. And, the takeover presents potential for significant cost synergies down the road, which will help boost profitability.

In the escalating fight for cable subscribers and the threat of "cord-cutting" among cost-conscious consumers, AT&T has an added advantage with DirecTV in tow. That's because DirecTV is the No. 1 satellite provider in the United States, with a valuable asset through its NFL Sunday Ticket package. DirecTV currently pays the National Football League $1 billion per year for the exclusive rights, which is a major advantage over other cable or satellite providers.

AT&T's financial position will be further strengthened by its recent bond offering. This was a great move, since the company was able to secure extremely low-cost debt, which it can use to help pay for the acquisition. Thanks to its solid financial condition and historically low interest rates, AT&T was able to sell $2 billion in debt at attractive rates. The offering included 30-year bonds which yielded only 1.4 percentage points more than similarly dated U.S. Treasury bonds, for a yield around 4.8%. That's actually lower than AT&T's current annualized dividend yield.

As a result of all these promising catalysts, AT&T increased its revenue growth forecast for this year. The company now expects to grow revenue by 5% this year, which would represent accelerating year-over-year growth. AT&T generated less than 2% revenue growth last year. If AT&T hits its goal, the company would more than double revenue growth from the previous year. This might allow AT&T to grant investors a more sizable dividend increase than the one-penny-per-share bump it's been giving the past few years.

The key takeaways
While AT&T has historically been labeled as a slow-growth, stodgy type of company, it has strong growth in store this year. It's on track to more than double its revenue growth from last year, thanks to its aggressive acquisition of DirecTV and its highly successful wireless business.

Buying DirecTV not only adds tens of millions of subscribers to AT&T, but it offers a highly valuable asset in the form of the NFL Sunday Ticket package. This gives AT&T a leg up against competitors, as well as a means to fight the "cord-cutting" phenomenon going on.

Plus, AT&T's savvy financial management will help blunt the financial cost of the huge acquisition. AT&T sold $2 billion of debt and took advantage of very low interest rates. The extremely long maturities will provide years of low-cost financing.

Most investors probably buy AT&T for its 5% dividend, which is certainly a valid selling point. But if it's able to meet its ambitious growth expectations, you might get an unexpected dose of capital gains in addition to the hefty distribution.

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

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.

  • Report this Comment On June 07, 2014, at 1:27 PM, 092326 wrote:

    Eighteen months ago your firm was negative on T, now it is positive. Have things changed that much?

  • Report this Comment On June 08, 2014, at 2:46 AM, CoreAndExplore wrote:

    @092326: Bob is not a Motley Fool employee; he is a contributing writer, as am I. We are freelancers, and thus have disparate opinions. TMF is an unusual site in this way, and is one of the reasons I enjoy it so much.

    @Bob: What do you think about the ability of T to maintain and increase its dividend over the coming years? Looking at its income statement and balance sheet, I quickly estimated about a 65% payout ratio right now. How does the DirecTV acquisition and related bond offering affect that? Also, what do you think we'll be seeing in the "goodwill" section of the balance sheet at year's end? I'm always leery of huge numbers there. One last thing - wasn't the deal consummated at around a $47 billion price-tag, rather than the $67 billion you stated? Anyway, nice article!

  • Report this Comment On June 10, 2014, at 11:21 AM, rciura wrote:

    092326: I second CoreAndExplore's opinion. There are a lot of writers who contribute to the Motley Fool. Sooner or later, we're bound to have different opinions. But I feel that helps us all make more informed, and better, investment decisions.

    CoreAndExplore: I'm very confident that AT&T will maintain the dividend and still raise it modestly every year. The dividend is why most people buy the stock and the company knows that. With DIRECTV, AT&T expects low/mid single digit earnings growth in 2014. That will provide more than enough room to bump up the dividend on schedule next January.

    I think they could give 2 cents instead of the usual 1, based on benefits of the deal, financial flexibility from the debt sale, and because the payout ratio isn't overly concerning, as you state.

    Goodwill may rise and is a concern generally speaking, but telecoms like AT&T generate a lot of free cash flow, which is the main issue for dividends in my opinion. Defense companies have a lot of goodwill too, and they are also robust cash generators that do a great job of raising dividends.

    Lastly, the equity value of the deal is $47 billion; total enterprise value is around $67 billion due to DIRECTV's net debt position.

    Thanks for commenting, and Fool on!

  • Report this Comment On June 10, 2014, at 11:39 AM, ffbj wrote:

    I bought some 100 shares at 34.50 and then watched it go down. At 32 I was debating whether to buy more, but I did not. Anyhow, it's a fair value, I suppose around 35. I went for one of the Dogs of the Dow, for the dividend which is not all that bad. Good article.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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Related Tickers

9/2/2015 10:38 AM
T $32.61 Up +0.29 +0.90%
AT&T CAPS Rating: ****
DTV $0.00 Down +0.00 +0.00%
DirecTV CAPS Rating: ***