Dow component AT&T Inc. (T – Free AT&T Stock Report), headquartered in Dallas, Texas, is the nation’s largest telecommunications holding company, with annual revenues around $130 billion, strong free cash flow, and a sound balance sheet. Through a network of subsidiaries and affiliates, the carrier provides wireless, Wi-Fi, high-speed Internet access, local and long distance voice, advanced TV services, and local search and advertising solutions. It is also the biggest global provider of IP (Internet Protocol)-based communications services to businesses. And it is a leader in mobile broadband, offering the best wireless coverage worldwide and the most wireless phones that work in the most countries.
A Baby Bell Is Born
As is the case with many of America’s corporate heavyweights, AT&T’s history is both long and complicated. The company, having come full circle in a way, has its roots in the original American Telephone & Telegraph Corporation, which was founded in 1876 when Alexander Graham Bell invented the telephone and was, more than 100 years later, broken up pursuant to an antitrust settlement with the U.S. Department of Justice. In fact, the carrier now known as AT&T was one of the seven original regional holding companies formed in 1983 when the old local Bell System was split apart.
At that time, AT&T was called Southwestern Bell Corporation. But it changed its name to SBC Communications in 1995. And it then went on a major spending spree, thanks, in good part, to the Telecommunications Act of 1996, which lifted restrictions on the kinds of businesses that the Baby Bells and other communications outfits, from long distance providers to cable operators, could enter. Indeed, over the next few years, SBC Communications acquired Pacific Telesis Group (PacTel), Southern New England Telecommunications Corp. (SNET), and Ameritech, each time expanding its customer base, enhancing its scope of services, and creating new cost-savings opportunities.
The next big deal was not until 2005, when SBC Communications purchased its former parent, the old AT&T Corp., as part of a strategy to more aggressively target the corporate long distance and IP-based business segments. That’s when the current, more recognizable corporate name, AT&T Inc., was adopted. The acquisition proved to be highly successful, ultimately generating annual run-rate cost synergies in excess of $2 billion.
Hoping to build upon this success and fend off newly emboldened cable rivals, especially Comcast (CMCSA) and Time Warner Cable (TWC) -- those cable giants are now set to merge in a $45 billion deal -- the company again dipped its toe into M&A waters in 2007, when it purchased BellSouth in an all-stock, $85 billion transaction. The blockbuster deal helped AT&T to gain ground in the booming broadband market, and moved the carrier closer to its goal of being a one-stop shop for consumers’ communications needs.
It also, notably, strengthened AT&T’s position in the increasingly important mobile space by giving the firm unified ownership of Cingular Wireless (now AT&T Mobility), which had been a joint venture between AT&T and BellSouth. Indeed, with total control of Cingular, the company was able to better build brand recognition (it quickly changed the Cingular name to AT&T Mobility), reduce customer churn, and widen its market-share lead over Verizon (VZ – Free Verizon Stock Report). (Verizon Wireless has since taken the top market-share spot from AT&T, catapulted by its acquisition of Alltel in early 2009.)
Today, AT&T is still garnering ample cost savings from its multiyear M&A binge. The bottom line, however, is mainly being buoyed by the company’s wireless unit, which got a significant boost when, in 2007, Apple (AAPL) selected AT&T Mobility as the exclusive U.S. carrier for the revolutionary, multimedia-enabled iPhone smartphone.
The company has since lost its iPhone exclusivity (all the major U.S. wireless carriers are now selling their own versions of the popular devices). And the mobile operations were dealt a setback in 2011 when AT&T’s $39 billion bid for Deutsche Telekom’s (DTEGY.PK) T-Mobile USA unit failed (stiff regulatory opposition forced the company to drop its acquisition plans). But AT&T, equipped with an improving broadband network and distribution agreements with several large OEMs, including South Korea’s Samsung, should still see its subscriber base and high-margined wireless data revenue stream climb nicely in the years to come. And the company should be able to wrest share from Verizon and T-Mobile, owing to a more aggressive pricing scheme, a new “Next” early upgrade program, and its just-completed (March 2014) acquisition of prepaid carrier Leap Wireless. That $1.2 billion deal will, we think, enable AT&T to widen its ultra-fast 4G LTE network and make further inroads in the growing, and highly lucrative, prepaid market.
The traditional wireline business, meanwhile, has been under pressure in recent years, because of a steady stream of access-line losses. But the division is benefiting from restructuring initiatives that have significantly pared the cost structure. In addition, U-verse, AT&T’s Internet-powered video service, is now helping to counteract the line losses, along with stepped-up efforts to attract business clients. Indeed, the new VoIP offering is enabling the company to sell more all-in-one product bundles and keep its cable rivals at bay.
All in all, we think that AT&T shares are well suited for conservative accounts, because of the company’s excellent finances and attractive dividend payout. The Dow component should be able to grow earnings at a decent, 7% annual clip through late decade, as well, given the current momentum on the wireless and U-verse fronts.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.