This Just In: Upgrades and Downgrades
Jun 19th 2012 10:02AM
Updated Jun 19th 2012 3:04PM
At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
It's all Greek to everybody
Now that Greece has voted a pro-bailout party into office, you might think that "risk" has been reduced in the stock market. Not so.
As the eurozone experts at PIMCO opined over the weekend, the perverse result of Greek commitment to austerity may merely be to draw out the process, create more uncertainty about the exact date when Greek reform efforts fail, and, as a result, add risk to the markets. So it was especially timely when yesterday the analysts at Janco Partners suggested a way to protect your portfolio from uncertainty -- not by doing anything remotely Greece-related, but by buying a nice, safe dividend stock instead, right here, close to home: AT&T (NYS: T) .
Value calling: Will you accept the dividend payment?
AT&T looks pretty good to dividend investors right now. Its 4.9% dividend yield isn't quite as generous as the 7.2% yield at Europe's Vodafone (NYS: VOD) , true. But AT&T's divvy has less Euro-risk attached to it. And it compares favorably to the 4.6% payout at fellow U.S. telecom Verizon (NYS: VZ) -- and even more favorably to dividend-less Sprint Nextel (NYS: S) and Leap Wireless (NAS: LEAP) .
Speaking of rivals, Janco argues that "AT&T tends to be more innovative than Verizon," citing Ma Bell's early adoption of the iPhone as proof. The analyst notes that AT&T is similarly ahead of the curve in offering both Nokia's Lumia smartphone and Samsung's newest smartphone and tablet products.
Best of all, though, in Janco's opinion, is the fact that AT&T's steady line of business and strong dividend policy make it a "classic risk-off" stock. Meaning simply that it's the kind of stock to which investors flock when worries about Greece, and widespread stock market risk, arise.
What's the catch?
Valuation-wise, of course, the case for AT&T is a bit less obvious. While next year's earnings estimates look strong on at least a trailing basis, AT&T still sells for an unattractive price-to-earnings ratio of 51.
The good news, though, is that focusing on GAAP "earnings" overlooks the fact that AT&T generates much more cash than its income statement lets on. Free cash flow for the past 12 months came to a whopping $14.3 billion, more than three times reported net income of $4.1 billion. When valued on this free cash flow production, therefore, AT&T actually looks attractively priced at less than 15 times FCF.
What's the other catch?
There is one final risk that needs to be addressed, however, and this one was raised by Janco peer Canaccord Genuity yesterday. After meeting with management at "three of the four largest wireless carriers in the past week," Canaccord came away with the firm conviction that price competition is going to intensify in this industry -- and soon.
This sounds like bad news, but in fact may not be for long. On one hand, Canaccord notes that T-Mobile is becoming "increasingly competitive" and should "begin to recover lost share" over the coming quarters. (Bad news for AT&T.) On the other hand, Canaccord expects both Metro PCS and Leap Wireless to struggle "to remain relevant over the long term." (And if they should fail to "remain relevant," this would result in less price competition, meaning good news for AT&T.)
On balance, the positives seem to outweigh the negatives here. AT&T's P/E ratio is high, but it's bound to fall, and already the stock looks cheaper when valued on free cash flow. Price competition will increase -- but only long enough to shake out the weaker players, leaving dominant telcos like AT&T stronger in the end.
Meanwhile, AT&T's stronger-than-average dividend should more than adequately compensate investors for sticking around to see the eventual good news. That's a key reason we recently named AT&T one of our top "9 Rock-Solid Dividend Stocks." To find out who else made the cut, just download the free report right here.
At the time this article was published Motley Fool newsletter services have recommended buying shares of Vodafone Group, and Fool contributor Rich Smith owns shares of Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 342 out of more than 180,000 members. The Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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