AT&T Inc. (NYSE: T) has become boring and is considered a dead stock by many investors and analysts. That doesn’t change one thing though: AT&T is still the highest dividend yield of the entire Dow Jones Industrial Average, and by almost a full percentage point. Now we have Credit Suisse’s Joseph Mastrogiovanni, who has maintained his Outperform rating and $39 price target on the stock following meetings with AT&T and recent announcements.
The call is following investor relations meetings and the positive tone from those meetings. If Credit Suisse is correct, then AT&T is undervalued by nearly 12% from the $34.91 closing price of Friday. There is also AT&T’s 5.3% dividend yield. Credit Suisse is much more aggressive than the rest of the street here because AT&T’s consensus analyst price target is closer to $35.70.
Monday’s analyst note suggested that AT&T provided 2015 capex guidance that was about 13.5% below consensus expectations. The news also includes the announced acquisition of Iusacell in Mexico for $2.5 billion, including the assumption of debt. Mastrogiovanni said:
We think this transaction gives AT&T a foothold in Mexico that it could use to expand in the region. We do not think it precludes AT&T from bidding on America Movil assets that are expected to come to market. In fact, it could allow AT&T to purchase America Movil assets at a better price, in our opinion. AT&T’s entrance into Mexico should increase the level of competition. Potential bidders should take that into consideration when evaluating a potential AMX sale and could assign a lower value or decide not to bid.
Another positive is this notion of slower capital spending, suggesting better 2015 free cash flow (FCF). Mastrogiovanni noted that AT&T expects 2015 capex to be in the $18 billion range, versus the firm’s estimate of $20.5 billion — implying a potential boost to FCF of up to $2.5 billion. Credit Suisse’s 2015 FCF forecast is $11.1 billion. On the dividend and other issues, Mastrogiovanni said:
Free cash flow of $13 billion would imply year over year growth of nearly 20% and a dividend payout ratio of 77%, excluding pending acquisitions. In addition to this new found free cash flow, our checks have suggested that there is a good chance we get tax extenders now that the elections are over. If this goes through, it could add up to another $2 billion to FCF.
Another driver was that AT&T indicated that it feels it can achieve long-term revenue growth in line with gross domestic product or better. Shares were up 0.5% at $35.09 in mid-afternoon trading on Monday, against a 52-week range of $31.74 to $37.48.
Sponsored: Tips for Investing
A financial advisor can help you understand the advantages and disadvantages of investment properties. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Investing in real estate can diversify your portfolio. But expanding your horizons may add additional costs. If you’re an investor looking to minimize expenses, consider checking out online brokerages. They often offer low investment fees, helping you maximize your profit.