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The Bullish and Bearish Case for AT&T in 2014

Jon C. Ogg

2013 was a considerable year for stocks, yet AT&T Inc. (NYSE:T) was among the five worst Dow stocks. The S&P 500 index rose by more than 29%, and the Dow Jones Industrial Average rose by 26.5%, with both indexes at all-time highs. 24/7 Wall St. has generated a bullish and bearish scenario for 2014 in each stock of the Dow, including AT&T. The question now is what to expect in 2014.

For starters, there are many macroeconomic factors to consider on top of just what lies ahead for the telecom giant. Most Wall Street strategists are forecasting higher price targets for the S&P 500. This rising tide may lift most ships, and hopefully even AT&T. It is generally expected that interest rates will rise, but rates may not actually rise by massive amounts. AT&T has a yield of well over 5%, so it already outyields the 30-year and 10-year Treasuries handily.

ALSO READ: The Bullish and Bearish Case for IBM in 2014

AT&T's outlook for 2014 is one that dividend and income investors are examining closely. Its gain in 2013 was just shy of 10%, and its current dividend yield for 2014 is 5.23%. After it closed out the year at $35.16, its consensus analyst price target is up at $37.08, and the 52-week trading range is $32.76 to $39.00.

One issue to consider about the poor performance is that AT&T did not rise with the market at the end of 2013, despite gains elsewhere in lackluster stocks. Investors seem worried or doubting, perhaps fearful that AT&T may take a Pac-Man strategy with a large international acquisition.

The bullish case for AT&T is that it is the king of the Dow for dividends. Who doesn't want to make more than 5% in dividends? Another potential boost is that its shares have been higher already, and analysts at one point were calling for AT&T to rise to above $40.00. AT&T also could find major growth by acquiring internationally. Even its capital spending plans seem reasonable given its size.

AT&T's bearish case is one with a lack of a story. It competes head to head with rival Dow component Verizon Communications Inc. (VZ), and now a would-be merger of Sprint, T-Mobile USA Inc. (TMUS) and others could be a competitive threat. T-Mobile has emerged as a new price structure threat to AT&T. Another scare is that AT&T could really try to make too substantial of an acquisition internationally, echoing the Vodafone buyout rumors circulating in late 2013.

AT&T's gain was only half of Verizon's in 2013, yet AT&T yields about a full percentage point higher than Verizon's stock dividend. If 2013 becomes a year of value investing rather than chasing growth and leadership stocks, investors could choose to chase AT&T back up instead of ditching it the way they have of late. AT&T also trades at only about 13 times 2014 earnings estimates.

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