AT&T’s Update Spells Good News for Shareholders

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AT&T (NYSE:T) is a household name that needs no introduction. It is a blue chip stock in the Dow Jones Industrial and is the highest yielding of all the Dow components, sporting north of a 5 percent yield depending on the current share price, which at $35.19 translates to 5.2 percent. The purpose of this article is to address the update that the company just gave and its comments regarding its guidance.

What caught my attention is that the company reported continued progress in the second full year of its Project VIP network investment plan, strong second-quarter wireless trends, and an increase in its full-year 2014 revenue guidance, while reaffirming its full-year guidance for consolidated margins, earnings per share growth, capital spending, and free cash flow. The first piece of good news is that AT&T’s Project VIP network transformation plan, announced in 2012, is ahead of schedule: The 4G LTE network now covers nearly 290 million people, and the company’s Project VIP broadband build is expected to take fiber to more than 400,000 new business customer locations by the end of the second quarter.

In mobility, AT&T expects to report second-quarter results that include postpaid subscriber net adds exceeding 800,000. The company anticipates approximately 3.2 million AT&T next smartphone sales, which have risen throughout the quarter and now are expected to be approximately 50 percent of total sales and approximately half of the company’s postpaid smartphone customer base. The AT&T Next and Mobile Share Value plans are driving a shift in the company’s wireless revenue components, resulting in higher equipment revenues and lower service revenues and average revenue per user, with no service revenue growth expected in the second quarter.

The company expects second-quarter wireless service earnings margins to be pressured year-over-year due to the increased sales activity and strong customer movement to the no-device-subsidy Mobile Share Value plans. Wireless service earnings margins are expected to be more than 40 percent in each of the three remaining quarters of 2014.

Wireline expectations for the second quarter include U-verse video additions bundled with broadband, predicted to continue to perform well. The company expects U-verse broadband to be solid, even with second-quarter seasonality and fewer migrations from DSL. The company also sees growing consumer preference for buying broadband and pay TV services bundled together, reinforcing the strategic rationale of AT&Ts proposed acquisition of DirecTV. It also sees continued growth in business high speed broadband adds along with strategic business services revenue growth in the mid-teens, with continued economic pressures.

Based on all of these trends, the company is raising its full-year 2014 guidance for revenue growth to be in the 5 percent range and reaffirmed its full-year 2014 guidance for stable consolidated margins, adjusted earnings per share growth at the low end of the mid-single digit range, capital expenditures in the $21 billion range, and free cash flow in the $11 billion range. As a reminder for readers, AT&T is scheduled to release its full second-quarter 2014 financial results after market close on July 23.

All things considered, this update is mostly bullish. You cannot go wrong buying AT&T. The key to success is timing your buys properly to acquire shares when there are broader market selloffs or large drops in the share price. The company is incredibly stable. Buying this stock allows the investor to collect a 5.2 percent dividend while having the possibility (and likelihood) of capital gains over time.

Disclosure: Christopher F. Davis holds no position in AT&T and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $39 price target.

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