With more wireless business in the latest quarter, AT&T continues to dial up profit gains.
But investors put the shares on hold Wednesday because the telecommunications giant said it expects free cash flow of $11 billion in 2014, roughly $1 billion lower than analysts had expected. Shares of AT&T (ticker: T) fell 2% to $33.05 midday.
AT&T's fourth-quarter results, released late Tuesday, showed net income of $2.6 billion, or 53 cents per share, three cents better than the analyst consensus. Revenue of $33.1 billion and earnings before interest, taxes, depreciation and amortization (Ebitda) of $9.8 billion were also better than expected, according to Thomson Reuters I/B/E/S. AT&T had a net increase in total wireless subscribers of 809,000 in the fourth quarter, including postpaid net additions of 566,000.
The better top-line numbers come as AT&T continues to fight in a fiercely competitive market. Postpaid net additions fell slightly short of analyst estimates and were below the 800,000 that T-Mobile picked up in its most recent quarter. However, AT&T reduced churn in the wireless business, which was the lowest in the company's history, at 1.1%. Analysts said the company's "Next" pricing plan, which lets existing users pay for new equipment in installments, appears to be limiting defections.
The stock's enticing 5.5% yield looks safe, despite heightened attention to AT&T's ability to cover the dividend. AT&T is paying out about 85% of its free cash flow as a dividend, which is high.
AT&T's aggressive tactics to gain customers and continued cost-cutting should please shareholders. The company said 2014 should be a peak year in a three-year, $14 billion capital spending plan that is expanding video services and LTE wireless access.
"The capex is unnaturally high now, and people underestimate that AT&T's capital spending can be pulled back," Jennifer Fritzsche, an analyst at Wells Fargo, tells Barrons.com.
Despite higher spending, AT&T's consolidated Ebitda margin rose to 28.1% in the fourth quarter from 26.4% in the year-ago quarter. Fritzsche thinks that AT&T, with its impressive dividend yield and stature as the largest and most diversified carrier, should be a core large-cap holding in the sector.
"We still like AT&T's Ebitda margin profile, with record-low fourth quarter churn of post-paid customers, and we like their new Next price plan, which should raise wireless margins by lowering handset subsidy pressure," says Fritzsche who rates the stock Buy.
Fritzsche thinks the stock can reach $42 to $44 based on a multiple of 15 times to 15.8 times the Wells Fargo estimate for adjusted 2015 earnings. Wells Fargo is looking for adjusted earnings per share of $2.79 in 2015. The consensus calls for earnings of $2.66 in 2014, and $2.81 in 2015.
Of course, there are plenty of bears on the stock, and some of them think AT&T's high level of capital spending will restrict share repurchases this year.
And should T-Mobile US (TMUS) and Sprint (S) merge, AT&T would likely sell off.
But neither of those pay dividends, and AT&T is investing in future growth that should ultimately lead to higher profitability, a higher stock price and more robust yield.
But investors put the shares on hold Wednesday because the telecommunications giant said it expects free cash flow of $11 billion in 2014, roughly $1 billion lower than analysts had expected. Shares of AT&T (ticker: T) fell 2% to $33.05 midday.
AT&T's fourth-quarter results, released late Tuesday, showed net income of $2.6 billion, or 53 cents per share, three cents better than the analyst consensus. Revenue of $33.1 billion and earnings before interest, taxes, depreciation and amortization (Ebitda) of $9.8 billion were also better than expected, according to Thomson Reuters I/B/E/S. AT&T had a net increase in total wireless subscribers of 809,000 in the fourth quarter, including postpaid net additions of 566,000.
The better top-line numbers come as AT&T continues to fight in a fiercely competitive market. Postpaid net additions fell slightly short of analyst estimates and were below the 800,000 that T-Mobile picked up in its most recent quarter. However, AT&T reduced churn in the wireless business, which was the lowest in the company's history, at 1.1%. Analysts said the company's "Next" pricing plan, which lets existing users pay for new equipment in installments, appears to be limiting defections.
The stock's enticing 5.5% yield looks safe, despite heightened attention to AT&T's ability to cover the dividend. AT&T is paying out about 85% of its free cash flow as a dividend, which is high.
AT&T's aggressive tactics to gain customers and continued cost-cutting should please shareholders. The company said 2014 should be a peak year in a three-year, $14 billion capital spending plan that is expanding video services and LTE wireless access.
"The capex is unnaturally high now, and people underestimate that AT&T's capital spending can be pulled back," Jennifer Fritzsche, an analyst at Wells Fargo, tells Barrons.com.
Despite higher spending, AT&T's consolidated Ebitda margin rose to 28.1% in the fourth quarter from 26.4% in the year-ago quarter. Fritzsche thinks that AT&T, with its impressive dividend yield and stature as the largest and most diversified carrier, should be a core large-cap holding in the sector.
"We still like AT&T's Ebitda margin profile, with record-low fourth quarter churn of post-paid customers, and we like their new Next price plan, which should raise wireless margins by lowering handset subsidy pressure," says Fritzsche who rates the stock Buy.
Fritzsche thinks the stock can reach $42 to $44 based on a multiple of 15 times to 15.8 times the Wells Fargo estimate for adjusted 2015 earnings. Wells Fargo is looking for adjusted earnings per share of $2.79 in 2015. The consensus calls for earnings of $2.66 in 2014, and $2.81 in 2015.
Of course, there are plenty of bears on the stock, and some of them think AT&T's high level of capital spending will restrict share repurchases this year.
And should T-Mobile US (TMUS) and Sprint (S) merge, AT&T would likely sell off.
But neither of those pay dividends, and AT&T is investing in future growth that should ultimately lead to higher profitability, a higher stock price and more robust yield.
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