Stepping Out with Ma Bell

05/24/2012 9:00 am EST

Focus: STOCKS

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

It may not seem like a sexy, dynamic company, but this telecom has everything it takes to be a world-class player—and payer, says Gordon Pape of Internet Wealth Builder.

One sector that is worth the attention of defensive-minded investors is telecommunications. Within the sector, my nod goes to industry giant AT&T (T), which traces its roots to Alexander Graham Bell in 1876.

The firm is far from being the fuddy-duddy company that many people imagine. It is the largest communications holding company in the world in terms of revenue. With customers in virtually every country on the planet, it is also the leading US provider of local and long distance voice services, and has more than 100 million wireless customers in the US alone.

First-quarter revenues came in at a staggering $31.8 billion, up $575 million or 1.8% from the comparable period in 2011. Net income attributable to AT&T totaled $3.6 billion (60 cents per share, fully diluted), up from $3.4 billion (57 cents per share) in the year-earlier quarter.

Free cash flow—cash from operating activities minus capital expenditures—totaled $3.5 billion. The company is using some of that cash to aggressively buy back its stock in the open market. During the quarter, AT&T repurchased 67.7 million of its shares for $2.1 billion. It has authorization to buy back up to 300 million shares.

What is especially attractive about AT&T is the fact it is showing strong growth in key areas. The company posted a net increase in total wireless subscribers of 726,000 in the first quarter, to reach 103.9 million in service. This included gains in every customer category.

Total wireless revenues, which include equipment sales, were up 5.4% year-over-year to $16.1 billion. Wireless service revenues increased 4.3%, to $14.6 billion, while wireless data revenues, driven by Internet access, access to applications, messaging, and related services, increased by more than $1 billion, or 19.9%, from the year-earlier quarter, to $6.1 billion.

Even wireline operating income, which has been falling in many telecom companies, gained 2.4% year-over-year, to $1.8 billion, as margins improved to 12.2% from 11.8%.

The shares currently pay a quarterly dividend of 44 cents ($1.76 a year) to yield 5.2%. AT&T has raised its dividend every year since the 1984 breakup of its monopoly, so investors who buy at the current price can expect their yield to gradually improve over the years.

AT&T is not immune to a market plunge, but no stock is. However, in terms of overall risk, it is an excellent addition to a defensive portfolio, offering stability, a good yield, and modest growth potential.

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