What AT&T’s Acquisition Means Going Into Earnings

On Tuesday, Federal Communications Commission (FCC) Chairman Tom Wheeler said that an order recommending approval of AT&T’s $49 billion acquisition of DirecTV (NASDAQ: DTV) has been sent to the other four FCC members. A number of conditions are reportedly attached to the recommendation.

According to the FCC, as part of the transaction, AT&T plans to divest its interest in América Móvil, a telecommunications company headquartered in Mexico. AT&T also has agreed to expand its fiber-optic broadband service if the deal is approved. And the company has been barred from applying data caps on customers unless it also applies the cap to the over-the-top video capability it is acquiring with DirecTV.

AT&T’s wireline footprint covers portions of 22 states, and AT&T has begun to expand its U-verse video and broadband services to reach approximately 75% of the customer locations in that footprint. AT&T currently provides some form of U-verse services to approximately 11.3 million households.

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The acquisition of DirecTV gives AT&T scale in the pay-TV business, which it hopes to parlay into boosting its own U-verse broadband video service. The FCC appears to be ready to let the AT&T try its hand at being a pay-TV provider.

This company has dominated the telecom scene for years, and while some analysts are lowering the company’s postpaid adds for the second quarter, many across Wall Street are becoming increasingly bullish on the Mexico business and the completion of the DirecTV deal, both of which look to add solid future revenues.

Oppenheimer points out that AT&T provides the highest dividend yield among the mega-caps at nearly 5.4%. With the close of DirecTV acquisition, the dividend payout will improve to 70% (from 96% as a standalone figure last year), providing a much more comfortable level for sustainable dividend growth going forward as the company will have a much safer margin for coverage.

A few analysts weighed in on the telecom giant prior to its earnings being reported:

• Stifel reiterated a Buy rating with a $41.50 price target.
• Sanford Bernstein has a Market Perform rating and raised its price target to $38 from $34.
• Cowen upgraded AT&T to Outperform from Market Perform and raised its price target to $40 from $35.

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So far, AT&T shares have performed decently; they are up 6.4% year to date.

Shares of AT&T were down 0.5% at $34.11 Thursday morning. The stock has a consensus analyst price target of $36.74 and a 52-week trading range of $32.07 to $37.48.