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AT&T: Value, Yield and Growth

Growth stocks are considerably overvalued, whereas value stocks are clearly undervalued. The pendulum could swing the other way soon.

Growth stocks are considerably overvalued, whereas value stocks are clearly undervalued. The pendulum could swing the other way soon, notes Roy Ward, editor of Cabot Benjamin Graham Value Investor.

August is traditionally a weak month for stocks, and September tends to be even worse. I will be looking for a mild correction in growth stocks with rotation into value stocks. I expect patient value investors will be rewarded between now and the end of the year!

AT&T (T) is the largest telecommunications company in the U.S. and its AT&T Mobility division provides the largest wireless service in the U.S. AT&T’s purchase of DirecTV in 2015 is a game-changer, propelling AT&T to the highest position in the U.S. pay-TV market.

Through DirecTV’s massive customer base, AT&T is attracting many new users to its wireless business. The merger will provide $2.5 billion ($0.40 per share) of cost synergies annually starting in 2018.

The company’s DirecTV-Now introduced a video streaming service over the internet that offers HBO, Cinemax, ESPN and other television programming. DirecTV-Now requires neither set-top boxes nor satellite dishes.

AT&T’s recent $18 billion purchase in government auctions included significant radio spectrum that will enable the company to pursue new business in the fast-growing Internet of Things market, where objects can be sensed and controlled remotely across existing wireless infrastructure.

AT&T boasts the fastest internet speeds in the U.S. via its 4G network, which reaches over 350 million customers.

Recently, the company announced plans to expand its super-fast fiber optic broadband service, GigaPower, to 38 additional cities, tripling its city locations.

The fiber optic network is becoming the most sought-after technology for secure and fast data transmission. The company also bought wireless assets in Mexico with plans to greatly expand its telecom business in Mexico and other Latin American countries.

AT&T is waiting for government authorities to approve its proposed purchase of Time Warner (TWX). If successful, the acquisition will add CNN, HBO and the Warner Bros. film and TV studio to AT&T’s portfolio. The deal, valued at $85 billion is due to close in the fourth quarter.

The company’s balance sheet is strong, and my risk rating for AT&T is very low risk. The company, a Dividend Aristocrat, has increased its dividend for 33 consecutive years. The company’s increase at the beginning of 2017 now provides a generous 5.1% yield.

At 13.1 times current EPS and at only 5.5 times cash flow, AT&T shares are a bargain. AT&T’s stock price will likely climb 22% and reach my $47.55 sell target within 12 to 18 months.

Roy Ward has been chief analyst of the Cabot Benjamin Graham Value Investor since 2003.

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