Stock of the Week
NYSE Symbol: T
Price as of 6/7: $35.45
A 4% pullback in the last two weeks was wiped out by a 2.6% rebound yesterday and today. The unemployment numbers this morning were right in line helping lift the markets. Interest rates have stabilized, but remain elevated as investors fear an end to quantitative easing. Interest rate sensitive sectors continue to come under pressure. Utilities and telecom, and many bond funds have fallen into a correction. Utilities are down over 10% since the start of May. Telecoms have come under similar selling pressure. This week we'll highlight a Dow component that's pulled back boosting its' dividend yield above 5%. The stock of the week is AT&T. AT&T and Verizon have benefitted dramatically over the last several years thanks to a boon in smartphone sales. Thanks to their reliable service and reception, AT&T has grown its' market share verse weaker rivals. The recent 10% pullback has bumped AT&T's yield back above 5% providing an attractive entry point for investors looking for current income in a defensive, blue chip stock.
AT&T will not report earnings until the middle of July, but a mid-quarter update indicated business remains strong. AT&T sees strong customer additions in the second quarter, specifically from stronger U-verse broadband and TV subscriber growth. AT&T expects postpaid wireless net adds of approximately 500,000. In the wireless segment, the company launched several successful promotions in the quarter which are driving strong sales, higher gross adds and smartphone upgrade rates similar to the first quarter. As a result, the company expects second-quarter wireless EBITDA margins to be comparable to the first-quarter. Additionally, given strong consolidated customer additions and investments in new growth opportunities, consolidated margins are expected to be down year-over-year which is a negative. The company, however, is not changing its full-year 2013 guidance provided in January, which included full-year revenue growth exceeding 2 percent.
AT&T's free cash flow remains strong with an additional $1 billion in cash proceeds. Also during the quarter, AT&T completed its second 300 million share repurchase authorization, and expects share repurchases to continue opportunistically under a new 300 million share authorization approved earlier this year.
AT&T is not a growth play, but solely for income. Currently the stock trades for 13 times earnings, 1.5 times sales, and 2 times book value. The company has a high debt level and is highly leveraged, paying out most of their income in the form of dividends or share buybacks. In this current low interest rate environment, investors demand income stocks and AT&T and Verizon are two blue chips for any income portfolio.