Telecom & Wireless

Is It Finally Safe to Buy AT&T After the DJIA Booted It?

AT&T Inc. (NYSE: T) was probably not too happy that it was booted from the Dow Jones Industrial Average (DJIA). Apple Inc. (NASDAQ: AAPL) has finally joined the Dow, and it was the replacement for AT&T. Now that the Dow index change has formally taken place, 24/7 Wall St. cannot help but wonder if it is finally safe for investors to start buying AT&T shares again.

Before undertaking any individual company analysis, it is necessary to recognize that there is now a huge difference between AT&T and Verizon Communications Inc. (NYSE: VZ). You also cannot evaluate AT&T or Verizon without considering the current price war that has been taking place with T-Mobile US Inc. (NYSE: TMUS) and Sprint Corp. (NYSE: S).

With Thursday being the official switch from AT&T to Apple on the Dow, one would have to expect that the few indexers who actually mirror the Dow would have already made their portfolio changes. Again, most indexers follow the S&P or Russell indexes rather than the Dow. Having an index that is price-weighted rather than market cap weighted, and which has only 30 stocks, is not the most representative of the broader market. Also, the Dow does not include transports, real estate investment trusts (REITs), utilities and so on.

ALSO READ: At Least 3 More DJIA Changes That Should Be Made

As far as how AT&T is different from Verizon, well AT&T still wants to own DirecTV (NASDAQ: DTV). Both companies want to own the wireless carrier space, and both companies are feeling heat from Sprint and T-Mobile. The largest difference for investors is that AT&T handily outyields Verizon with its dividend — at 5.65% versus about 4.45% for Verizon. Also, Verizon’s $205 billion market cap is only about $32 billion higher than AT&T as of now.

The big issue here is that Sprint and T-Mobile seem almost willing to drive themselves into financial ruin to gain market share. Sprint is now going on an unlimited cost effort to steal customers away from their existing carrier. The latest effort from T-Mobile also sounds like the company could lose serious amounts of money on it. Sprint’s newest growth ambition is to take over space from bankrupt RadioShack locations.

Another consideration for AT&T, and Verizon for that matter, is the argument around net neutrality. How this plays out is still up for debate. Verizon said the FCC’s decision was a move back to the 1930s. Also, Verizon has already made its monster deal, for the rest of Verizon Wireless from Vodafone Group PLC (NASDAQ: VOD). That multibillion-dollar deal transformed Verizon, but there was a huge debt offering to help Verizon pay for it, and that happened just in time for more aggressive price war efforts from Sprint and T-Mobile.

AT&T shares were trading at $33.25 on Thursday morning. That is up from the $32.75 or so on Wednesday before Fed Chair Janet Yellen telegraphed that the interest rate hikes would not be immediate nor drastic in scope. Back on March 6, when the DJIA change was announced, AT&T shares had closed at $34.00 the prior day. They closed down at $33.48 on the same day the announcement was made. AT&T’s lowest closing price since then was listed as $32.62 on March 11, so shares have hardly rallied from the lows since the index announcement.

The verdict for the end of 2014 earnings from AT&T, announced in late January, was that the report was good enough to keep investors interested. Shares were at $33.30 after the earnings, so not much has changed since then.

ALSO READ: 6 Dream Mergers That Ought to Happen

Perhaps the biggest question to ask is how AT&T will grow on its own during a wireless price war. If it acquired DirecTV it can grow, but DirecTV is not exactly a rapid growth engine now. Analysts are looking for flat earnings per share growth at DirecTV in 2015, with sales growth of about 4% to $34.6 billion. AT&T’s 2015 earnings are expected to be more or less flat as well at $2.52 per share, with revenue growth of not even 2%.

AT&T shares have a 52-week range of $32.07 to $37.48. The consensus analyst price target is at $34.17, and the highest analyst price target is now $39. When 24/7 Wall St. ran the 2015 Bull and Bear Case for AT&T at the start of this year, the consensus price target was $34.90, and the highest price target was $40 at that time. That left total upside of 9.5% if you include the dividend. Not much has changed since.

One thing that has to be considered also is that AT&T’s latest short interest reading, as of the end of February and before the Dow change had been announced, was a whopping 316 million shares. This makes AT&T one of the most heavily shorted stocks on the New York Stock Exchange — or, make that the most shorted NYSE stock. That short interest has risen 11 consecutive short interest reports now, and the short interest was under 200 million shares last summer. Its days to cover is also highly elevated at 15.8, up from under 10 last summer.

With such a high dividend yield, it seems unlikely that existing AT&T investors will to hit their panic buttons any time soon. That being said, growth investors are almost certainly looking elsewhere — perhaps even in the DJIA replacement stock of Apple.

ALSO READ: 6 Big Dividend Hikes Expected Soon

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