Last week we recommended BCE Inc. (NYSE: BCE) as a way to stabilize your portfolio amid market volatility. We chose a superb company that's a leader in Canada's telecommunications field and has a consistent history of generating ample cashflow. This cashflow allows the company to keep increasing its safe, high dividends and to repurchase shares.
Now, don't get me wrong – I'm not pushing you into a defensive investment cocoon. I still love the opportunity to make huge profits from the advent of new technologies that are revolutionizing both computing and communications in a way not thought possible only a few years ago. Assuming you have measured your risk appetite and incorporated many high-potential return opportunities in your portfolio, adding low-Beta, dividend-rich winners such as last week's and today's (Monday) will improve your portfolio diversification, reduce volatility and add some serious income.
Today's stable dividend winner is in the skyrocketing world of mobile computing. Powerful smartphones are giving us brand new capabilities, which greatly improve productivity. And the growing variety and availability of cloud computing services are already impressive. From mobile e-mail to mobile web-browsing and even mobile video and geo-location-based services, there's a myriad of applications now available to consumers. These services are only possible thanks to large technological improvements and investments in wireless networks.
Some of the most promising plays on these commanding trends are already delivering hefty double-digit returns in our subscriber portfolios, so why not go for some stability and income while benefiting from this technological revolution?
We are going to do precisely that by investing in a major player in the telecommunications field: AT&T Inc. (NYSE: T).
AT&T is not part of the Dow Jones Industrial Average by mistake. It has earned this privilege for decades. The firm has successfully evolved through the years – including a merger with SBC Communications in 2005 – to adapt to huge regulatory and technological changes.
As we saw with BCE last week, the name of the game in telecommunications is bundled services – especially wireless. In this latter field, AT&T scored a masterstroke when it became the exclusive service provider for the Apple iPhone. The smartphone's huge success, along with other attractive phones that AT&T secured exclusively, has built strong earnings momentum going forward.
This strategy, leveraging on the firm's financial muscle, has allowed AT&T to add wireless subscribers at a steady clip, to the point that wireless represents almost half of the firm's earnings today. AT&T and Verizon Communications Inc. (NYSE: VZ) dominate the industry comfortably with a combined 60% of revenue and subscribers in the wireless market.
The iPhone's dominant appeal is at the core of this success. The iPhone allowed AT&T to gain more affluent and profitable customers. It also increased customer loyalty and reduced the dreaded customer "churn" (cancellations of service). The phone's advanced capabilities promote ample usage of data services and texting as well as strong and profitable growth in voice services.
This success comes at a cost: The iPhone demands a huge amount of bandwidth. And this bandwidth taxes networks, which need to be expanded in order to keep users happy. This is why AT&T's investments in its network showed a marked pick-up in the second quarter. This is exactly as we anticipated in the Money Map VIP Trader.
It is AT&T's ability to stay ahead of the bandwidth-addiction trend that will allow the company to expand its lead. The company has the broadest access to very valuable "real estate." AT&T's spectrum of frequencies necessary to actually deliver data over the air is unlike any other rival, and gives it an unparalleled competitive advantage.
The success with wireless more than compensates for the cannibalization of fixed residential telephone lines. More and more people are giving up their traditional fixed lines and embracing mobile phones. Also, fixed residential telephone lines are suffering a slow death at the hand of voice over Internet Protocol (IP). Services like Vonage Holdings Corp. (NYSE: VG), Skype and others provided by cable companies are taking an increasing toll on traditional telephony, whether it is for residential local service or for domestic or international long distance calls.
But again, even in this environment, AT&T's disciplined cost management allowed for margin improvements in the last quarter. This validates the careful approach AT&T takes to its business strategy. AT&T is the undisputed leader in fixed business wireline services, which account for about one-fifth of its sales. Its vast network in the United States is vastly superior to that of the cable companies.
As a result of these successes both in wireless growth as well as in wireline cost controls, earnings have been growing consistently and beating estimates since the October 2008 global financial crisis.
AT&T is trading at a mere five-times earnings before interest, taxes, depreciation and amortization (EBITDA). To give you an idea of how good that is, these types of low multiples were the targets of vulture funds trying to buy difficult, illiquid business in the troubled mid-nineties Latin America. And now we can get them in a very well managed and cashflow-rich strategic business in the United States.
The stock has been pulsing up and down in a channel between $24 and $28 for the last 12 months. AT&T.is clearly more profitable than industry averages, has less debt than competitors and enjoys a lower price/earnings (P/E) ratio, which has been falling consistently over the last few quarters to today's cheap level as earnings have been increasing. As this continues, holders are cashing in on a dividend yield of 6.3% while they wait for the stock to go up to a higher range. My analysis shows that it is some 25% undervalued right now, so we are going to take advantage of this opportunity.
Recommendation: Buy AT&T Inc. (NYSE: T) stock at market now. Conservative investors might want to dollar-cost average into this stock over the next two months. (**).
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in AT&T Inc.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
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