July 7, 2014 - A Call on AT&T for Higher Returns?
AT&T has long been a household name, but the company has gone through a lot of changes over the years as it keeps itself relevant to the needs of modern consumers. The name has been sold so many times, it is hardly the same company. Recently, the company put in a bid for DirecTV (DTV), a deal many expect that it will go through. AT&T is buying Direct TV to better compete against the cable companies by offering a broad mix of the latest technologies to consumers. It should reduce competition for the company and give it a better broader reach. The deal could help turn AT&T into a diverse multimedia powerhouse instead of just a phone company.
Times are changing and the future is here. The dream of fast high-speed internet, streaming television shows and internet on the go has arrived. Old technologies still exist but companies have to constantly change to keep up with the latest trends. You still get mail and broadcast TV, but really when was the last time you mailed a letter? Sure you have an email account, but how many personal emails do you really get? Some people still have home phones, but most people just use cell phones. Some people rarely answer their phone anymore preferring to communicate by text.
The world is full of media options and it is likely to remain full of them for a while. People can choose between cable, DSL, and other high speed internet solutions. With TV available over the internet and many different ways to get the internet, competition is intense between the phone and cable companies. It is hard to know exactly which technologies are going to be the winners over the long term, so companies are using multiple strategies to try to keep themselves relevant to consumers' needs.
Some people have gotten rid their cable bill realizing they can download movies and television shows online from Netflix or Amazon. Why pay for something you don't need? As bandwidth increases, AT&T is steaming more content directly to mobile devices.
DirecTV costs about $112 a month and if you are a sports fan, it's the go to place to see all the games. Sports is also a great place to advertise, because unlike a lot of television programming that is recorded to watch later, sports is still mostly watched live. Satellite technology also has some advantages in that it can reach across countries without a lot of additional expense. Direct TV broadcasts a number of channels into Latin America resulting in about about one quarter of its revenue. Per customer, the company only makes about $60 a month in revenue from Latin America, but that figure is growing.
AT&T may well see some synergies by combining services. While it makes sense to run fiber optic right into densely packed neighborhoods, it is more costly to reach rural areas. Both cell phones and satellites have distinct advantages outside of major cities.
Chart courtesy of stockcharts.com
AT&T stock is trading near $35.67 and the January 36 call has a bid of $0.84. If an investor were to buy the stock and sell the call at the same time he could enter for a $34.83 net debit. That trade would target returns of 3.4% or an annualized return (for comparison purposes only) of 6% between now and expiration. The stock also has a dividend yield of 5.2%. Because AT&T pays a big dividend, that makes any covered call on the stock much more attractive. Based on past dividends, if you buy the stock before July 10, you should be able to pick up three dividends payouts of $0.46 each. Of course we won't know the exact amount of the dividends until they are declared. If the stock rises and is assigned the $34.83 investment could bring in $0.84 in option premium, $0.33 in stock appreciation and $1.38 in dividends. That could be ((0.84+0.33+1.38)/34.83)=7.3% over 197 days or an annualized return in the area of a 13.5%.