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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8884  
Subject: Re: AT&T: Financial Shenanigans Date: 4/22/2013 11:44 PM
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What I tend to do when I see such an alarmist article about a company that is generally considered a widows and orphans' stock is take a look at it's financial history to see if something obvious has changed. Usually, the sign of a good company is consistency; they keep plugging along in good times and bad with only relatively small fluctuations in their margins and returns on capital. Think Wal-Mart.

In AT&T's case, returns on equity and capital have, with only a few exceptions been pretty consistent over the last decade. In fact they were in their upper range last year. Net margins took a bit of a dive, but that was in 2008 and they've remained between 10% and 11% since.

Earnings per share have been between $2 and $3 a share since 2006. What is relevant for the future is that they are predicted to grow modestly at least for the next couple of years.

The long-term debt ratio has increased over the decade, from 30% to 41%. Not a trend that investors would necessarily want to see continue.

Book value has grown over the decade, averaging a 6.5% CAGR, but it does fluctuate as the company dips into its tangible equity, now and again, presumably to help bolster the dividend when necessary.

Capital expenditure is quite high, but that's the nature of the business; it doesn't make it a bad business.

Share buybacks and net profit: The company's net profit has flat-lined some over the past few years and share buybacks have been a tailwind behind rising per share earnings. But, as far as describing share buy-backs as "an unsustainable financial shenanigan" in bold-face, no less, I don't think so. After all, stock holders own shares, not the whole company. The fewer shares there are the more the remaining shares are worth, all things being equal. I don't think Warren Buffett sees IBM's history and commitment to buying back shares as financial shenanigans, but as a tail wind behind the share price and its likely appreciation. Buying back shares is only potentially problematic down the road for shareholders if the company is paying much more for them than they are worth. I'd say that AT&T's shares are at least fully valued now, if not a little rich, but not overly so. If the stock were $50 a share now I would consider buying back shares a bad practice, but they aren't.

There's some verity to what the author writes but he tends to awfulize. For example, no doubt there are declines in land-lines but his conclusion that their wireless business can't grow enough to compensate for this is pure conjecture. And another example: sure, margins have been under pressure, but not that much; they are still sitting comfortably within a normal range.

From bear to bull: Value Line has the horns, not the claws. Far from feeling that AT&T is a house of cards held up by unsustainable financial shenanigans, they rate AT&T 1 for Safety (highest), A++ for Financial Strength (highest), and give them 90 out of 100 for Earnings Predictability. They expect earnings to grow over the next three to five years at 7% a year, the dividend payment to grow at 4% a year, and the share price to be between $45 and $50 for 2016-'18 (assuming a reasonably sensible P/E of 14). Not a fast grower, but a dependable income vehicle. To quote them: We like this high-quality issue as a defensive play for income-oriented investors. AT&T's stable business, excellent finances, and attractive dividend yield make this a good core holding, in our view.

I come down somewhere in the middle. I'm not as sanguine as Value Line, but nowhere near as pessimistic as the SeekingAlfa article. I think the stock is fully valued, but given the run-up in the market over the last 18 months undervalued stocks are few and far between. If AT&T's stock price rose another $10 in short order I'd be inclined to sell, because of valuation, not because I think the company is about to implode.

kelbon
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