att-logoWe really like AT&T (NYSE:  T) at this point.  We like it so much we now own it.  I even mentioned it to someone this morning who was complaining about the 3% rate he was getting on his fixed annuity.  I told him that AT&T is paying over 5%.

It recently popped up on our defensive growth screen, and this is what the numbers tell us.

  • P/E:  24.3
  • P/B:  2.0
  • P/S:  1.4
  • D/E:  0.8
  • ROE (5-Year):  20%

Beyond the valuation numbers, AT&T has positive free cash flow, and the liquidity numbers look strong. Basically, it is a cash machine, and it rewards its investors with a 5.46% dividend yield.  Gross margins are at 60% and net margins are north of 14%.  The margin numbers are indicative of a company that can rule its domain.

Given all of this, we place a conservative $36.25 target price on the stock.  Couple capital growth with the dividend yield, that gives AT&T a margin of safety of 14.4%.  While this is not greater than our normally required 15%, we did buy it when it was sitting at $31.95.

If one looks at the chart, it appears that bottom line growth is wanting.  We acknowledge that, but we also recognize the importance of top line growth, and that is the driver of this evaluation.  Revenues for AT&T have grown, on average, 11% per year, and there is no indication that it will slow down.  Eventually, that will have an effect on the bottom line.

AT&T Chart

We know this is a bit of a contrarian play, and focuses on top line growth, ala O’Shaughnessy, but we think you need to add it to your portfolio.

This is what others are saying about AT&T

  • Edward Jones (Buy)
  • S&P IQ Capital (Hold)
  • Reuters (Positive 10)
  • Second Opinion (Avoid)
  • Morningstar (Hold)
  • Microsoft Money (8 out 10)
  • Zacks (Hold)

Happy investing.


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