UBS Upgraded AT&T Today: Here's Why

In a report published Tuesday, UBS analyst John C. Hodulik upgraded the rating on AT&T Inc. T from Neutral to Buy, while raising the price target from $34 to $42.

Analyst John Hodulik believes that the stock has “an attractive risk/reward scenario” in view of its historical trading levels as well as expectations for:

• High-single-digit EPS growth
• Improving near-term trends
• A significant decline in the dividend payout ratio

The underlying results at AT&T's core domestic wireless business can be expected to show a “meaningful improvement” in 2Q. “While the U.S. wireless industry remains competitive, comps get significantly easier given efforts to re-price the base last year. This should ease pressure on ARPU and service revenues,” the UBS report stated.

Hodulik believes that the Mexico strategy is “an attractive, relatively low-risk opportunity that should add incrementally to wireless growth in 2017.”

The near-term financial benefits from the acquisition of DIRECTV DTV appear to be “underappreciated by the market.” Hodulik also expects AT&T's dividend payout to improve to around 70 percent after the close, from 97 percent in 2014 and “remain in the mid-60s range in 2016-17E, providing room for sustainable dividend growth going forward.”