It looks as if the gamble on high-speed Internet service is paying off for AT&T (NYSE: T); the company’s revenues suddenly shot up during 2015. Something for investors to be aware of is that AT&T is actually the regional telecom formerly known as Bell South, not the historic telephone monopoly broken up decades ago.
Like Alphabet (NASDAQ: GOOGL), AT&T has taken a gamble on high-speed Internet with a service called U-verse. Unlike Alphabet’s Fiber, U-verse is available in about 36 cities, ranging from Green Bay, Wisconsin, to Los Angeles. Strangely enough, U-verse, which offers speeds ranging from 3.1 to 18 megabytes per second (MBPS) is available in San Jose, home to the Googleplex, but Fiber is not.
How Google Fiber Threatens AT&T’s Future
Alphabet claims Fiber provides a speed of up to one 1,000 megabits, or 125 megabytes, a second, so it is clearly a superior product, at least on paper. Yet is a product that is only available in four cities: Austin, Provo, Atlanta and Kansas City, Missouri.
Fiber would be serious competition for AT&T if it ever rolls out because Alphabet (NASDAQ: GOOG) wants to bring the service to some of the cities where AT&T offers U-verse. A list of cities for possible Fiber rollout includes Raleigh, Charlotte, Chicago and Los Angeles, all areas were U-verse is available. Fiber already competes directly against U-verse in Austin and Kansas City, and it will be rolled out in San Francisco and San Antonio, where AT&T operates.
This could make Alphabet AT&T’s biggest competitor at some point in the near future, but it is not clear when that will be. Naturally, value investors will want to know if AT&T is making money and if it is a good investment.
AT&T’s Growing Revenue
AT&T did see a sudden and rather interesting surge in revenue growth last year. It started 2015 with a TTM revenue of $132.45 billion and finished the year with a revenue figure of $146.8 billion. That makes for an increase of $14.35 billion, which comes from the merger with despised satellite TV provider DirecTV.
The question investors need to ask is, is this surge in revenue for real, or is it just a side effect of the merger? If it is, it is not organic growth, but it could give AT&T a lot of float. The float will come from all those phone bills and DirecTV subscriptions AT&T charges.
The financial numbers show us that AT&T does generate a lot of float. It reported a net income of $13.24 billion, a free cash flow of $3.092 billion, $35.88 billion in cash from operations, a profit margin of 9.51% and $5.12 billion in cash and short-term investments for the fourth quarter of 2015.
This company certainly generates a lot of cash, which makes it a definite value investment, but is it returning that cash to the customers? The answer to that question is yes, AT&T pays off for investors.
A Really Good Contrarian Investment
Its shareholders received a dividend yield of 4.85%, a return on equity of 13.05% and a dividend of 48¢ a share on January 6, 2016. This makes AT&T that fascinating hybrid: a value investment that’s also a dividend stock.
There’s another reason why AT&T is a really good contrarian investment right now: It is very cheap. The telecom was trading at $38.96 a share on March 18, 2016, and it was undervalued. AT&T had a market cap of $239.62 billion and an enterprise value of $362.63 billion on the same day.
So AT&T is a great buy if you’re looking for a dividend stock or a great contrarian investment in tech or telecoms. Yet it is not without risks, because of the changing face of the industry.
The rise of streaming video certainly threatens DirecTV, although it helps AT&T because customers need Internet service to get that streaming video. The real danger is Alphabet’s high-speed Fiber, as we noted above. Alphabet is offering a superior product, but it is moving very slowly in its rollout.
Should AT&T Be Worried about Google Fiber?
Yes, AT&T should be worried about Fiber because Alphabet certainly has the resources to roll it out very quickly if it wants. Alphabet reported a net income of $16.42 billion, a free cash flow of $4.31 billion, $26.02 billion in cash from operations and $73.07 billion in cash and short-term investments on December 31, 2016.
It is the huge amount Alphabet has in cash and short-term investments that should worry AT&T and its investors. A lot of that money is sitting in foreign bank accounts to avoid U.S. corporate taxes. Bloomberg estimated that Alphabet could have around $16 billion stashed overseas.
Alphabet is going to need a lot of tax write-offs if it ever brings that money back into the United States. The cost of installing Fiber in a few dozen cities would certainly generate a lot of tax write-offs. Basically, Alphabet could cover the cost of a widespread Fiber rollout in a couple of dozen large cities with what it has in the bank.
There is some indication that Alphabet is planning this. Last year The Denver Post reported that Fiber had applied for a business registration in Colorado, yet that state does not appear in Google’s Fiber expansion plans. This means that Alphabet may have already laid the groundwork for a Fiber expansion.
So AT&T could be facing some serious competition, but that competition is purely hypothetical. Until Fiber actually starts rolling out on a large scale, AT&T is a great value, contrarian and dividend play that would look good in your portfolio.