When telecom giant AT&T (NYSE: T) reported its second-quarter results in July, both revenue and adjusted earnings came in ahead of expectations, but the company’s projections put investors in a sour mood.
AT&T added 813,000 postpaid phone subscribers in the second quarter, and it benefited from a 1.1% year-over-year increase in average revenue per user as customers embraced unlimited plans.
Its fiber business is also doing well with 316,000 new fiber customers in the quarter, bringing the total to 6.6 million and helping boost broadband revenue 5.6%.
So what’s the beef? Well, AT&T now expects to produce free cash flow of $14 billion for the year, down from a previous outlook of $16 billion. This isn’t a sign of shrinking business, but instead of many customers delaying payments slightly in a tight economy. Wireless service has become as essential as home internet access, so it’s unlikely that many customers will drop service entirely in tough times.
Meanwhile, AT&T is better able to handle periods of turbulence now that it’s greatly reduced its debt following its Time Warner spinoff. Its stock had a recent dividend yield of 6%, too. While AT&T isn’t immune to an economic slowdown, it has been through such cycles before. Lower free cash flow this year is disappointing, but it doesn’t change the long-term story.
Ask the Fool
Q. I’ve heard many economists are worried about “stagflation” – what’s that? – G.K., Londonderry, New Hampshire
A. Stagflation, combining the words “stagnation” and “inflation,” refers to an economic environment with slow growth, high inflation and high unemployment. The Corporate Finance Institute notes, “Such an unfavorable combination is feared and can be a dilemma for governments since most actions designed to lower inflation (such as hiking interest rates) may raise unemployment levels, and policies designed to decrease unemployment (such as lowering interest rates) may worsen inflation.”
Many economists are not too worried about stagflation in the United States right now. For one thing, unemployment is currently very low, recently at 3.2%. And inflation, while high, has shown signs of slowing, with gas prices and airfares recently dropping.
Q. Who are the main players trading in the stock market, making prices go up and down? – B.N., Davenport, Iowa
A. Many are individual retail investors placing small buy and sell orders through brokerages. There are also big institutional investors doing a lot of trading, such as banks, credit unions, pension funds, mutual funds, hedge funds and insurance companies.
Stock prices rise or fall because of supply and demand. When a stock is in great demand, many will want to buy, and its price will rise. If it falls out of favor, there will be many sellers, and the price will fall until it hits levels at which there are buyers.
Big players may benefit from fancy research departments, but small investors have advantages, too. For example, we may invest in a great small company early, before institutions start to pile in. Once they start buying many shares, that can drive up its stock price, benefiting smaller, earlier investors.
My smartest investment
My smartest investment? Well, considering that I met my wife through Match.com way back in the Oregon Trail days of online dating (around 2004) – and that I’ve made a 345% return on the stock since investing in it – I’d say Match Group has been my best investment, hands down. – D.P., online
The Fool responds: It’s hard to argue with that kind of smart investment!
Connecting with Match.com may have been your best investment even if you hadn’t bought the stock. It’s worth pointing out that while a 345% return does indeed seem great, knowing how long you held the stock would let us determine just what your average annual growth rate has been. If you gained 345% over five years, for example, you’d have averaged 35% per year. If your 345% gain had been in a stock you held for 20 years, your average annual gain would have been about 8%, a bit below the S&P 500’s average return.
Today, Match Group is an online dating powerhouse, home to not just Match.com, but also Tinder, Hinge, OkCupid, PlentyOfFish and OurTime, among other sites. (Tinder is the most downloaded dating app worldwide.) It rakes in more than $3 billion annually and has more than 16 million paying subscribers.
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