Published: July 1, 2010
This past weekend Apple (Nasdaq: AAPL) customers
waited in lines across the country to buy the new iPhone 4.
Apple sold a remarkable 1.7 million iPhones in the first three
days alone. This comes on the heels of a great showing for the
debut of the tablet PC, aptly named the iPad. More than three
million iPads have been sold during the first 80 days since its
Investment banks and analysts have been rushing to upgrade
shares of the tech giant as a result. Bullish analysts are
placing estimates as high as $350 on the shares. But the experts
appear to be overlooking a major beneficiary of the iPhones' and
iPads' huge sales numbers.
That overlooked company is telecommunications giant AT&T
AT&T is reaping the rewards of the brand loyalty of Apple
customers. AT&T currently has 85 million subscribers worldwide.
With the release of the new iPhone 4, the company stands to lock
in millions of new and returning subscribers with a minimum
So far, about 77% of iPhone 4 sales have gone to existing iPhone
customers. Another 16% of new iPhone buyers left their current
carrier to join AT&T and the remaining 7% were AT&T customers
that upgraded to an iPhone. These numbers should translate into
increased long term revenue from the sale of more data plans.
It's important to note that there are concerns about AT&T
potentially losing its exclusivity agreement with Apple to sell
the iPhone. There are rumblings that Verizon (NYSE: VZ)
and Apple are close to striking a deal that would allow Verizon
to roll out an iPhone of its own, potentially dealing a blow to
AT&T's growing subscriber base.
AT&T recently halted its flat rate pricing for unlimited data
plans. New customers will have to pick from tiered data plans
from now on. Customers that exceed two gigabytes of data on the
upper-tier plan in a month will have to pay for additional
usage. This could be a significant revenue driver for AT&T as
customers continue to consume more data at faster speeds. And
the potential for higher revenue is only growing with the
increasingly popularity of apps, downloadable movies and video
Last quarter, AT&T added nearly two million new cell phone
subscribers and 500,000 customers who are locked into long term
contracts. Wireless data revenue grew by +30%. Operating margins
were solid at 17.6%.
AT&T generated $40 billion dollars in revenue from its wireless
and wireline businesses last year. This year, the company
expects to earn more than 50% of revenue -- $62 billion dollars
from these two business units alone.
And while AT&T's landline business is in decline, growth in the
broadband Internet and mobile phone business should be more than
enough to offset the decline in revenue while churning out
Action to Take ---> AT&T
appears to be selling at a discount. Shares are valued at just
10 times next year's earnings, below the industry average of
12.4. The stock is also trading at a cheaper valuation than its
main competitors, Verizon and Sprint (NYSE: S).
AT&T is worth buying for the
dividend alone. The stock sports an incredibly generous
dividend yield of just over 6.5%. The dividend appears safe.
AT&T is currently paying out 74% of earnings in the form of
dividends. While the
payout ratio is high, AT&T has been able to increase its
dividend for 26 consecutive years. There is no reason to believe
that AT&T will not be able to sustain its dividend going
forward. With such a hefty dividend, investors will be rewarded
handsomely just for holding shares while they wait for the
market to see the underlying value in the shares and they begin
-- Mark Riddix