NEW YORK (TheStreet) – No one is going to deny that AT&T (T) is a mature company. Growth has slowed over the past couple of years, but the Dow component is one the market's top dividend payers with a yield of 5.20%.
The company's management isn't satisfied with the status quo. It wants to show Wall Street that maturity is not an enemy of growth.
AT&T's $48.5 billion deal for satellite TV provider DirecTV (DTV) was its first real sign of how serious management has become. Observers are taking a wait-and-see attitude. The company reports second-quarter earnings Wednesday.
The stock closed Monday at $35.96. Shares are up 2.3% on the year to date. But over the trailing 12 months, AT&T stock has gained only a fraction, trailing the telecom sector's 12% gain. During that same span, both smaller rivals Sprint (S) and T-Mobile (TMUS) have gained 27% and 29%, respectively.
I would be a buyer here ahead of Wednesday's report. Investors are discounting AT&T in several critical areas -- both on its on merits and on the potential accretive value from DirecTV.
First, on its own, the stock is trading at just 10 times trailing earnings, even though shares are a mere 2.5% away from their 52-week high. When we factor the valuation on fiscal 2015 estimates of $2.75, AT&T shares still trades at a P/E of 13, which is three points below the industry average and one point below Verizon (VZ).
From my vantage point, AT&T is trading on the assumption that it will yield little to no growth. But there are more reasons to own this stock than for its dividend.
With DirecTV coming onboard, I think AT&T can reach $42 sometime in 2015. I say this knowing full-well that the deal still needs to pass regulatory approval. I don't think the market fully appreciates how much scale AT&T can drive across all of its businesses through DirecTV.