Ma Bell Still a Top Earner

10/05/2012 10:09 am EST

Focus: STOCKS

Genia Turanova

Editor, Leeb Income Performance

Through good times and bad, for decades, this company has found a way to make money for its investors…and the story hasn't changed, writes Genia Turanova of Leeb Income Performance.

AT&T (T), the largest US telecom company, is a good example of how dominance in a business sector can pay off in both price appreciation and dividends.

AT&T has a solid balance sheet, a stable business model, more than $125 billion in annual sales, and nearly $4 billion in net income. Going forward, we envision AT&T earnings per share growing at least at a mid–single digits rate, and quite possibly higher, based on several factors.

One is the recent strength in its wireless business, where the company sees 2% growth in postpaid average revenue per user and a higher number of subscribers. Another is the expansion of its 4G LTE network, which will facilitate competitiveness and future growth. Also, its wireline business, both enterprise and consumer, has been stable.

With 250,000 employees, its operations are not limited to the US—it also has exposure to Latin America through a 9.5% stake in America Movil.

AT&T is a free cash flow machine: management expects it to reach $15 to $16 billion for the year, with the firm’s capital budget remaining stable at about $20 billion. The natural uses for free cash flow are dividends and share buybacks, and AT&T excels at both.

Most recently, in late July the company’s Board of Directors increased its authorization of share repurchases by 300 million shares—about 5% of shares outstanding, doubling the existing authorization.

Note that over the course of the last two quarters, the company has already bought back about 143.5 million shares, having returned $4.6 billion to shareholders via buybacks. Plus, it paid more than $5 billion in dividends over that same period.

This indicates that the company is not considering its current price too high for buybacks. Going forward, we expect both buybacks and dividend increases to continue. Yielding 4.7%, it’s a buy up to $40.

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