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.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends DirecTV. 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.