I’m running late today and working on a few pieces that aren’t done yet, but I don’t want to leave our fabulous Gumshoe readers with nothing to think about… so let’s get a quick teaser solution out for you.
The pitch is from David Dittman for his Utility Forecaster, the conservative, income-focused newsletter that was run for years by Roger Conrad (before he left to start his own shop a couple years ago — he now puts out Conrad’s Utility Investor), and it’s all about the “Jetsons Home.”
Which is, of course, a reference to the “smart home” and “Internet of Things” trend that has waxed and waned for years but is at the top of investors minds again — not least because of big new advancements, more integrated capabilities and compelling products like the Nest thermostat (now owned by Google), and more smartphones that can be used to control and communicate with these “smart homes.”
Dittman teases a couple stocks, and I may get to the others for you in a future installment (or intrepid Gumshoe readers can jump in with ideas if you like) but one of them gets the headlines — here’s how he hints at it for us:
“Jetsons’ Home of the Future Opportunity #1—The Reemerging Giant
“Google, Microsoft and Apple see the opportunity in Smart Homes and are clamoring to find a way in.
“But there’s another giant that’s getting in on the game, too. This company has been around since 1875. In the past 10 years, their stock is up 137%, beating the S&P 500 by 21 percentage points. As a bonus, it yields 5.2%.
“If you’re looking for a utility company to invest in, this company is a great buy.
“But they’ve recently been shaking things up and making bold moves.
“Forbes recently reported:
‘[Company] is likely to have gained share and caught up with the market leader following its acquisition of [company]…’
“Now, as an emerging market leader, they’re offering home automation services for as little as $4.99 per month to their current customers.
“I’ve been researching this company for years, and I’m convinced that it will be a key player in bringing the Jetsons’ Home of the Future to millions of utility customers.
“You can get all the details in my special report, ‘The Jetsons’ Home of the Future Is Here: How to Cash In on a New $600 Billion Opportunity.'”
So … who is it? Thinkolator sez this is AT&T (T)
Which, yes, you’ve heard of. The Forbes article quoted is actually a Trefis analysis of AT&T’s main competitor, Verizon (VZ), you can check it out here if you like, but the main gist is that AT&T’s acquisition of LEAP Wireless is helping them catch up with Verizon — the two are effectively a duopoly in the US prepaid mobile phone market, each having about a third of the market (the remaining third is split between Sprint and T-Mobile, who are both incapable of the investments needed to grow much at this point). I own Verizon, personally, and have for a few years, but I don’t object to AT&T — both are very good utility companies with excellent national footprints and solid wireline and wireless businesses that generate tremendous cash flows.
But no, AT&T is not going to rise or fall because of the Jetsons or because of anyone paying up $4.99 a month for an electronic front door lock — it’s probably wise that they’re in the smart home business, since all their competitors are as well (the money making plays on smart homes start, really, with security and monitoring systems right now — that’s the foot in the door for everyone from AT&T to ADT to Comcast, the base of relatively affluent consumers who are ripe for the $20-50/month for temperature or leak monitoring, remote locks, alarm services, etc). It’s pretty clear that most of the telecom companies are trying to add this to the “bundle” packages that they’ve developed over the years, so perhaps one day most of us will have a single bill with Comcast or AT&T or whoever that covers cable TV, internet access, wireless phone, landline phones if anyone still wants one, and “smart home”/security system monitoring.
That’s a “maybe someday” but it obviously doesn’t drive AT&T returns right now — what drives their returns are the average customer bill, primarily for wireless services, and net customer churn. Which is all working fine right now, and telecom services (internet and wireless phones, particularly) are really now necessary utilities for almost all Americans. So AT&T looks pretty decent here, it’s trading at a lower PE multiple than usual (PE is about 10 now) and, thanks to the recent drop, it’s up to a 5.5% yield. I’m happy holding Verizon as a good, slow growth utility stock with an above-average yield, and I’d probably be equally happy holding AT&T for the same reasons — I still like Verizon a little bit better thanks in part to their strong return on capital and free cash flow numbers, but that’s probably being unnecessarily picky — Verizon has a substantially lower current yield at about 4.6%, and the total return performance of these two competitors is essentially identical over the last decade.
That’s the dividends-included total return number, which is what Dittman teases when he says AT&T has beaten the S&P by 21 percentage points — VZ has done essentially the same over that decade, though over the last five years VZ’s total return has been dramatically better than T, up 125% vs. about 70% for both AT&T and the S&P 500… that probably at least partly because of the Verizon Wireless/Vodafone transaction that boosted VZ considerably starting a couple years ago. And, in case you’re wondering, over the last year both of those telecoms have trailed the overall market — though they are both positive, and are down much less than the market over the last month, as you’d expect for a “blue chip” type utility stock.
So there you have a it — will AT&T make you rich because of smart phones, or for other reasons? Do their offerings conjure up images of George Jetson for you? Let us know what you think with a comment below.
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