Stocks - BUY - AT&T

Long time no post. Sorry for that. I was busy and also lacking the motivation to edit new articles in the last months, but now I found some time and the motivation to carry on. There is some need to recap what has happened in the last months. So let’s start with new investments and portfolio changes.

I found a favorable time to get rid of my remaining E.on shares. When the company informed the market about its plans to split profitable and less profitable assets into two separate entities, the market received this as a positive signal. The price went up above EUR 15 in December, close to my initial acquisition price. So I decided to exit. In my opinion, there is no purpose to stay invested as shareholder in a company which reduced dividends repeatedly and which still finds itself in a transition phase.

After receiving the old funds, the stock of AT&T, which had been on my watchlist for quite some time, became fairly priced and so I decided to purchase 40 stocks for EUR 26.46.

AT&T is one of the two US telecommunication incumbents (the other being Verizon). It is the second largest provider of mobile telephone (after Verizon) and the largest provider of fixed telephone in the United States, and also provides broadband subscription television services.

Mobile data transmission has become more and more important in past years, reflecting the significance of smartphones in societies around the world. With the US market reaching saturation, AT&T has been expanding its footprint in Mexico and also awaits regulatory approval for its proposal to buy satellite TV company DirecTV for USD 48.5bn. The transaction aims at forming an integrated communications company with serious broadband reach and improved and more competitive bundled services.

I had my doubts about this massive acquisition price as mentioned in an earlier article. But strategy wise I believe this step makes sense, because revenue growth is slowing down and price competition is further increasing. 

At the same time, it is also worth mentioning that AT&T is part of the dividend aristocrat index, with a track record of more than 25 years (to be precise 30 years) of rising annual dividends. As such, I am not purely considering financial or strategic aspects, but also rely on the reliability and predictability of such a list.

At the time of the purchase, AT&T was providing me with a 5.50% yield-on-cost. Due to the current EUR devaluation in comparison to the USD, the yield-on-cost has further improved to 6.25%.

I take comfort in the stock also from the following facts:

• One of the two incumbent US telecommunication players
• Current market capitalization of USD 169bn
• Solid S&P A- investment grade rating
• Moderate 13x price-earnings ratio
• Healthy equity ratio of 30% as per FYE 2014
• Preliminary 2014 annual turnover of USD 132bn
• Preliminary EBITDA of USD 25.1bn (18.9% margin)
• Preliminary Net profit of USD 6.5bn (4.9% margin) – profit reduced in ‘14 due to USD 7.9bn of extraordinary pension expenses
• Expected dividend payout ratio of around 75% after DirecTV acquisition
• 2015 dividend of USD 1.88 translates into a 6.25% yield at given price and EUR/USD fx rate
• Dividend was raised 30 years in a row