AT&T announced Tuesday a share buyback program worth nearly $16 billion at current prices and its biggest-ever dividend increase, sending shares of the top U.S. phone company up about 7 percent.
The boost to shareholder returns was bigger than investors had expected and came with AT&T's forecasts for long-term revenue growth of mid-single-digit percentage or better, which was also stronger than some analysts had anticipated.
"The dividend and buyback will give the stock a lot of support if we do enter a recession," said UBS analyst John Hodulik. "They're just producing a lot of cash."
Chief Executive Randall Stephenson at the company's annual meeting with analysts in New York said AT&T was seeing strength in its traditional voice and data business as well as wireless and video services.
The company also forecast double-digit growth in adjusted earnings per share in 2008 and mid-teens percentage growth in revenue from its wireless business, including the newly acquired Dobson Communications Corp.
AT&T , which completed its acquisition of BellSouth late last year, forecast that savings from merger synergies and other items would increase by $2 billion in 2008.
"We have good momentum right now and you can expect that ramp to continue," Stephenson said.
"We're just pretty darn confident with where we are," the CEO said when asked about the timing of the buyback and dividend announcements on the sidelines of the event.
AT&T said it would raise its quarterly dividend to 40 cents a share from 35.5 cents. The 12.7 percent increase is the largest in the company's history.
It said it would complete a newly authorized buyback of 400 million shares by the end of 2009. At current market prices, the buyback is worth $15.7 billion, equivalent to nearly 7 percent of AT&T's market value of more than $230 billion.
Through Dec. 7, AT&T had repurchased more than $13 billion of stock under a buyback program announced in 2006.
To Expand U-Verse
AT&T in presentation documents for the meeting forecast that 2008 cash flow would rise to between $16 billion and $17 billion before dividends. In October it had forecast 2007 free cash flow after dividends of $6 billion to $7 billion.
As well as battling phone rivals such as Verizon Communications and Sprint Nextel, AT&T is building a video service to compete with cable operators such as Comcast.
Stephenson said the company plans to extend its advanced broadband and video service, called U-verse, to 30 million customer locations by 2010. This compares with its earlier plan to pass 17 million homes with the service in 2008.
"That's a significant expansion," Hodulik noted.
AT&T said it expects to end 2008 with more than 1 million U-verse video customers. It expects its U-verse investment to reduce 2008 earnings per share by an "incremental" 12 to 14 cents.
It also said it expects annual consolidated revenue growth in the mid-single-digit percentage range for 2008 and forecast mid-single-digit revenue growth or better beyond next year.
Analysts said AT&T's revenue growth outlook was a sign it was seeing strength in its core business despite concerns about the slowing U.S. economy as well as profit improvements from merger-related savings.
"The big change today is we're looking at meaningful long-term revenue growth ... that should result in multiple expansion," said JP Morgan analyst Jonathan Chaplin.
He said AT&T's share price trading multiple had trailed that of Verizon due to investor perception that AT&T was depending on merger synergies for earnings growth.
Chaplin said AT&T's multiple could increase by 15 to 20 percent as a result of Tuesday's outlook.
AT&T shares were up $2.47, or 6.5 percent, to $40.37 on the New York Stock Exchange after reaching a session high of $40.69. In comparison, Verizon shares were flat at $45.35.