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Here's Why You Should Hold AT&T (T) in Your Portfolio Now

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On Jan 10, AT&T Inc (T - Free Report) was upgraded by a notch to a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Catalysts Supporting the Upsurge

AT&T’s wireless growth opportunities from the launch of standards-based mobile 5G services in 2018 and the FirstNet project look impressive.

The FirstNet Project is a ray of hope for AT&T in 2018. Recently, AT&T and the First Responder Network Authority (FirstNet) revealed the inclusion of 50 states, two U.S. territories and Washington D.C. in the FirstNet project — the first dedicated nationwide wireless network for first responders.

Outpacing other players — Verizon Communications Inc (VZ - Free Report) , Sprint Corp (S - Free Report) and T-Mobile US Inc (TMUS - Free Report) — in the race for 5G, AT&T became the first company to offer standards-based mobile 5G services in various U.S. markets by late 2018. Notably, the completion of 3rd Generation Partnership Project’s (3GPP) first implementable 5G New radio (NR) specification has set the stage for the global mobile industry to start full-scale development of 5G NR for large-scale trials and commercial deployments in 2019. Since 2017, AT&T has been working hard to lay the foundation for mobile 5G network. The company has completed network upgradation in 23 major cities

Additionally, AT&T is likely to benefit from the following prospects. If the new FCC scraps Net Neutrality laws, the ISP (Internet Service Provider) industry will be the major beneficiary. AT&T is a major ISP. Net Neutrality, which disallowed discriminatory pricing policy, has significantly reduced revenues and margins of ISPs. Also, the U.S. telecom industry is likely to benefit from the proposed tax-reform bill of President Trump. The proposal to reduce corporate taxes from the current 35% to 20% is will lower corporate tax rate to its historic low in 78 years. Major telecom operators book much of their revenues in the homeland. Therefore, a significant reduction in corporate tax rate will be immediately accretive to cash flow.  In 2018, AT&T is likely to benefit from the deployment of 60 MHz of fallow spectrum and 600 MHz low-band spectrum along with its ongoing network-densification project. Therefore, immediate investment in all tangible, intangible and real property (other than land) will significantly benefit AT&T.

With such opportunities, AT&T raised its quarterly dividend by 2% to 50 cents per share (annualized $2.00 per share). Sanctioned by the company’s board of directors, the dividend will be paid on Feb 1, 2017 to shareholders of record as of Jan 10, 2018. This marks the 34th annual dividend increase by the company. The dividend hike was backed by strong cash flows and business outlook.  Notably, in third-quarter 2017, AT&T generated $11,114 million of cash from operations compared with $10,995 million from the prior-year quarter. Free cash flow in the reported quarter was $5,863 million compared with $5,182 million in the year-ago quarter. Management expects free cash flow to be enough to pay debt and return cash to shareholders.

In December 2017, AT&T’s over the top (OTT) online streaming service — DIRECTV NOW — reported more than 1 million subscribers, despite cord-cutting. The company reported a net gain of approximately 0.213 million DIRECTV NOW connections, since Sep 30, 2017.

Further, AT&T and Verizon have teamed up with Tillman to build cell towers in the United States. AT&T’s NetBond is gearing up to offer multiple cloud connections. AT&T is exploring a strategic option to sell a major part of its Latin American pay-TV operations.

Headwinds

AT&T witnessed dismal trends in 2017 and continues to struggle in the competitive and almost-saturated wireless market. The U.S. wireless industry is likely to become more competitive in 2018 with the entry of cable MSOs (multi service operators). Comcast already entered this space with its Xfinity Mobile offering. Charter Communications reiterated its plans of launching wireless service in the first half of 2018. Adoption of several unlimited data plans resulted in a reduction of wireless service revenues and average revenue per user (ARPU).

Moreover, AT&T’s wireline division is struggling against persistent losses in access lines as a result of competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by cable companies. These are weighing on the company’s revenues and margins.

Operating expenses, marketing costs associated with attractive discounts, regulatory norms and union issues are other headwinds. AT&T-Time Warner have extended their proposed deal closure deadline to Jun 21, 2018 to clear-off regulatory issues. This is the fourth instance when AT&T has changed the closure date to gain the remaining regulatory approvals required to close the merger.

Backed by such headwinds, shares of AT&T grew 2.5% compared with the industry’s rally of 4.3% in the past three months.

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