AT&T and DirecTV: Game-Changer?

09/15/2016 7:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Our latest featured recommendation is the largest telecom company in the US and one of the largest in the world, asserts value investor J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

AT&T (T) is the largest wireless service in the US. The landline services include AT&T U-verse broadband and video and voice services.

AT&T’s $49 billion purchase of DIRECTV is a game-changer. Through DIRECTV’s massive customer base, AT&T will attract 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.

DIRECTV’s DirecTV-Now will launch a video streaming service over the internet that will offer HBO, Cinemax, ESPN and other television programming. DirecTV-Now will require neither set-top boxes nor satellite dishes.

The new streaming service will serve every segment of the streaming video industry and offer customers any content virtually wherever and whenever they want it.

AT&T’s recent $18 billion purchase of significant radio spectrum in government auctions 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 US via its 4G network. Recently, they announced plans to expand its super-fast fiber optic broadband service, GigaPower, to 38 additional cities, tripling its city locations.

The company also bought wireless assets in Mexico with plans to greatly expand its telecom business in Mexico and other Latin American countries.

Sales and EPS will likely advance 4% during the next 12 months ending June 30, 2017 before accelerating thereafter. The company’s balance sheet is strong, and my risk rating for AT&T is Very Low.

The company has increased its dividend for 33 consecutive years and now provides a generous 4.7% yield. At 14.5 times current EPS and at only 6.0 times cash flow, AT&T shares are a bargain.

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By J. Royden Ward, Editor of Cabot Benjamin Graham Value Investor

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