AT&T Weathers IPhone Hit
The telecom firm generated strong cash flow, though revenue from new smartphone customers couldn't offset the cost of phone subsidies, says Morningstar's Michael Hodel.
AT&T (T) weathered the impact of Apple's (AAPL) iPhone 5 launch reasonably well during the fourth quarter, though the device continues to have an outsize impact on the firm. The fixed-line business turned in fairly solid results, while strong consolidated cash flow enabled aggressive share repurchases without adding significantly to leverage. We don't expect to change our fair value estimate materially in light of the quarter.
Cash flow was the biggest bright spot at AT&T during 2012, in our view. The firm generated $4.3 billion of free cash flow during the fourth quarter, bringing the total for the year to $19.5 billion. After funding $10.2 billion in dividend payments and spending $12.8 billion to repurchase shares, AT&T's net debt load increased about $3.4 billion during 2012 to $65 billion. With modest growth in revenue and stable margins, net leverage increased only slightly to 1.58 times operating income, excluding depreciation and amortization, from 1.54 times at the end of 2011. AT&T repurchased 371 million shares (6% of the total outstanding) during 2012 and expects to complete its 600 million-share authorization by the middle of 2013. The buyback completed in 2012 will cut about $670 million off AT&T's dividend payout in 2013. Considering that the firm can currently borrow money for 10 years at less than 3%, we believe the modest increase in leverage is an attractive trade for stronger dividend coverage as capital spending ramps up over the next couple of years.
Michael Hodel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.