Call on AT&T (T) for income and growth

"While a record number of firms were slashing payouts this year, this one actually hiked its. And while other telecoms saw profit margins plummet, this company actually strengthened its.

"As an integrated phone company with a huge footprint in both fixed line and wireless operations, AT&T has a well-balanced revenue stream. The company has achieved seven consecutive quarters of rising average revenue per user.

"How are they doing it? In a word: iPhone. To put it simply, if a wireless subscriber wants an iPhone, he or she will have to subscribe to AT&T. This deal has been boon for AT&T.

"AT&T activated 3.2 million iPhones in just the third quarter and about 40% of the activations were from new customers.

"Since mid-2007 the company's wireless subscriber count has increased 28%, largely due to the iPhone. Moreover, wireless data services (Internet and text) revenue, the high-margin segment of the wireless business, grew 34% in the third quarter of 2009.

"As a result of the iPhone's popularity, profits in the wireless segment soared 41% for the third quarter, and AT&T earned $0.54 per share, beating analysts' estimates.

"Total earnings did fall 1.2% from the year-ago quarter to $3.2 billion. But considering what has happened to the economy since the third quarter of 2008, this stable performance is impressive.

"Earnings are expected to increase about 6% next year to $2.25 per share, as AT&T continues to offset losses in the fixed-line business with growth in the wireless segment and upgrade wireline customers to AT&T U-verse, an Internet and pay TV bundle.

"Despite the company's steady performance, the shares have lagged. What's the issue? A major risk going forward is the iPhone. AT&T's exclusive deal with Apple is set to expire at a yet unspecified date in 2010. Apple may choose to extend the deal, but if it doesn't, it will most certainly hurt AT&T's earnings.

"Still, the loss of exclusivity won't be disastrous thanks to AT&T's diverse revenue stream. For example, the company was still able to add 641,000 prepaid wireless subscribers for the third quarter that are completely independent of the iPhone deal.

"Also, AT&T provides phone and IP services to many businesses that have been hurt in the recession. An economic recovery should increase revenues from those sources.

"Meanwhile, the company is in stellar financial shape. Debt of $73 billion is less than 75% of the $100 billion in shareholders' equity. Operating income of $5.4 billion covers interest expense by a factor of more than six. As well, the company carries more than $6 billion in cash on its books.

"Most important, the company can easily afford its dividend, even if business were to slow. Net income of $3.2 billion covered dividends of $2.4 billion with a comfortable 75% payout ratio in the last quarter, while free cash flow of $5.5 billion covered the dividend easily.

"Further, the stock is cheap. This security is still well below its 2007 high of near $45 per share, and at a price of less than 15 times free cash flow, it's trading at nearly half the industry average of 28 times free cash flow.

"This looks like a great entry point for conservative investors looking for a highly stable stock that could well see capital appreciation."

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