Summary
The worst legal uncertainty with the Time Warner merger is in the past.
AT&T can cover its dividend with ease.
The Time Warner merger provides exciting opportunities for future growth.
Investment Thesis
AT&T (T) is currently a strong buy with an attractive dividend yield combined with excellent prospects for future top-line revenue growth. AT&T is also currently trading at a very low PE of six; this would seem to be due to the uncertainty surrounding its legal battle over the Time Warner merger. This uncertainty is causing the market to discount AT&T at a very steep rate making it an attractive buy.
AT&T has scored a first major legal victory over the government in its merger with Time Warner. This victory would lend legitimacy to AT&T’s stance that the government's claims are without merit. While in most of AT&T’s business segments it would be considered a mature business where large growth is much less likely by virtue of its size. The story of slowing growth would not appear to the be the case with its Time Warner segment where the merger with AT&T creates attractive possibilities for growth.
In the last five years, AT&T has seen some top-line revenue growth; this top-line growth is likely to continue and or hasten with the Time Warner merger which allows AT&T to compete in a market that is separate from the mature part of its business. AT&T currently trades with a 6% dividend yield, as well as with a PE of 6, a heavy duty PE of 12.7 (Market Cap + Total Liabilities – Cash \ EBITDA), and is currently sitting on 13.5 billion in cash at the end of the most recent quarter. The dividend is also extremely well covered by operating cash flows. All of these factors speak to the financial strength of AT&T which is currently trading at a discount.
