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SBC Flying Under the Radar

How does a Dow 30 stock fly "under the radar?" When the company announces a multibillion dollar merger and Wall Street says, "Let's wait and see what happens."

Since the $16 billion merger with AT&T (NYSE: T  ) was announced in late January, the stock of Motley Fool Stock Advisor recommendation SBC Communications (NYSE: SBC  ) has traded virtually unchanged and is close to a two-year low.

One cause for the lack of movement is negative press on the merger -- like mine. Sure, there are plenty of positive takes like this one, but many investors, like me, were looking for an earnings recovery at SBC in 2006 and were planning to collect the healthy 5.6% dividend while we waited for Wall Street to awaken to the good news.

The battle between Verizon (NYSE: VZ  ) and Qwest (NYSE: Q  ) to buy MCI (Nasdaq: MCIP  ) , AT&T's long-distance telephone rival (and a former Motley Fool Inside Value recommendation), has also been stealing the spotlight. The Qwest offer stands at $9.7 billion for a company with $1.4 billion in free cash flow across the trailing 12 months -- and the mean analyst earnings estimate is for a $0.23 profit for 2005 to become a $0.02 loss for 2006.

The bad rap on AT&T is that estimated earnings of $1.97 this year decline to $1.30 next year. Hey, it's better than a loss, and SBC is buying a premier brand name that gushed $3.7 billion in free cash flow across the trailing 12 months. Said another way, SBC is paying 60% more than Qwest is offering for MCI to get a company (AT&T) delivering 2.6 times the trailing-12-months free cash flow. Go figure.

The latest good news at SBC is first-quarter adjusted earnings, which, boosted by strong broadband sales, beat analyst estimates by $0.01 per share. That excludes the impact of merger-related costs assigned to 60%-owned Cingular, a joint venture with BellSouth (NYSE: BLS  ) and the nation's largest cell-phone operation.

That good news has sent the stock up only 1% today. Wall Street doesn't seem to notice that a long-term powerhouse is being built with AT&T Wireless being added to Cingular and AT&T being added to SBC.

What attracted Motley Fool co-founder David Gardner to the stock is that it sells for half what it traded for five years ago, which he labeled "bargain bin;" its excellent dividend; and its leadership in both telecom and wireless. SBC, bargain hunters, is selling for 2.4% below his recommended price.

SBC is flying below Wall Street's radar right now. But, this is a stock that is, in my own belief, even appropriate for conservative investors looking for a big stock dividend.

Fool contributor W.D. Crotty owns stock in SBC and Verizon and is praying that MCI will become part of Qwest -- a stock, like BellSouth and MCI, that W.D. does not own. Clickhereto see The Motley Fool's disclosure policy.

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