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Berko: Apple’s core another reason to stick with AT&T

By Malcolm Berko

Published: March 3, 2019, 6:05am

Dear Mr. Berko: I bought 500 shares of AT&T at $32 in 2012, and I’m losing money. I should have sold the stock in 2016 when it hit $44, but my stockbroker talked me out of it. Now I want to sell it and buy 100 shares of Apple, which is way down from its high price. My broker is adamant that I keep AT&T, and he doesn’t care for Apple. I’d appreciate your opinion.

— LG, Akron, Ohio

Dear LG: Kudos to your wise broker. I recommend that you follow his advice.

AT&T (T-$31.26) pays a spotless 6.7 percent dividend, which was recently increased for the 35th consecutive year. T has had a stinky past 12 months, linked to Washington’s objections to the Time Warner merger, worries about subscriber losses, wishy-washy prepaid mobile additions and a queerly volatile market. However, the acquisition of Time Warner, now known as WarnerMedia, could be the master stroke that creates the most powerful media juggernaut in the country. T has been one of the largest distributors of media connectivity for over 20 years. Now combining distribution with connectivity, T can become the iconic Ma Bell it once was. Meanwhile, T’s high-yielding $2.04 dividend, totaling $15 billion, represents an attractively low 60 percent payout from T’s prodigious $25 billion free cash flow. That’s a 1.66 coverage — and with a lot of investor comfort built in there.

T’s 2019 earnings are expected to come in at $3.70 a share, up 5.7 percent from last year’s $3.50. That’s not insignificant! When management combines DirecTV with content from WarnerMedia (CNN, HBO, TNT, The CW, Cartoon Network, Turner Classic Movies, etc.), advertising sales should increase grandly, as will the per-second fees paid by advertisers. And that’s really significant! Smoothly coordinating WarnerMedia with DirecTV will require most of this year to accomplish, but it will put T in the position to become the dominant media and telecom company in the U.S. Additionally, many observers see T as significantly gaining ground in the expanding digital advertising arena, where its analytical tools will enable management to generate a panoply of customer promotions.

So, with debt levels slowly declining and the introduction of 5G and other technologies, T’s revenues, earnings and dividends should continue to grow faster, and T may become the ne plus ultra of media stocks. T should be an appealing commitment for conservative income/growth investors. Many T-watchers believe that by the end of this year, its share price will run to the $40-$41 level, the dividend will rise to $2.12 and the shares will yield slightly over 5 percent. I’d buy 500 more shares in a Sioux City second.

Apple (AAPL-$174) traded at $232 last October, and I doubt we will see $232 again in this decade. CEO Tim Cook blamed AAPL’s slide on a lower revenue forecast caused by an economic slowdown in China, which accounts for nearly 20 percent of revenues. Well, Timmy Boy, you’re wrong. Though the iPhone may be the most successful consumer product since bottled water, the market is saturated. About 2.5 billion people own a smartphone, and user replacement cycles are lengthening because new models offer only marginal improvement. And they’re still terribly expensive! For all but gadget aficionados, the slowing race to upgrade is a welcome relief.

AAPL’s first-generation iPhone was released in June 2007. Since then, there have been 20 different models, each with more features than a Chinese dinner menu. But global smartphone sales have fallen in each of the past four quarters, and 2018 was the first full year of decline. Industry observers believe that 2019 and 2020 sales will be anemic. Smartphone sales have peaked and should level off at about 1.4 billion units annually. Certainly, Tim Cook’s new forecast shows that AAPL is feeling the same chill as the industry. There are nearly 760 million iPhones in use worldwide, including some secondhand iPhones. AAPL’s core product is its iPhone. Because that core seems to be deteriorating, I’d not care to own the stock.

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