Robert Rapier is an industry-leading growth and income expert; he recently became senior editor of Investing Daily's Utility Forecaster. Here's his review of AT&T (T).

AT&T is the largest company in our model portfolio. The company has evolved from its origins as a long distance provider into a provider of a wide range of communications, Internet, and media services.

There’s no denying that AT&T’s stock performance has been mediocre in recent years. In fact, the company’s total return over the past year was negative 6.6%. The primary reason for this underperformance has been the company’s declining service revenues in its wireless business for several years.

Nonetheless, I remain confident that our faith in AT&T will be rewarded. For starters, the company has invested heavily into its media business. This diversification should ultimately create a stronger company, although the acquisitions have increased debt levels.

AT&T paid $67 billion for DirecTV, which included the assumption of DirecTV’s debt. The Time Warner acquisition will cost $85 billion, and drive AT&T’s net debt to $180 billion.

The uncertainties about the strength of AT&T’s wireless business and the growing debt load as the company moves further into media ventures have helped drive AT&T’s share price down.

Two particularly important metrics I consider when evaluating a company are its Cash from Operations (CFO) and its payout ratio. The former indicates whether the company’s moves are improving its financial position. The latter is an indicator of how much of a company’s earnings are being paid out to shareholders as dividends.

In AT&T’s case, both measures are indicative of a business that is growing and paying a sustainable dividend. I believe AT&T’s underperformance over the past year already reflects the warning flags, and that the improvements in several important metrics have yet to be reflected in the share price.

The current 6.1% yield is high by historical standards but can be easily supported with existing cash flow. The risk of a dividend cut seems low. I rate the stock a buy below $40 a share.

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