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Why It’s OK AT&T is Overpaying for T-Mobile

March 23, 2011 – by Richard Band

Following Monday’s rally, stocks backpedaled a bit yesterday, with the Dow Jones Industrial Average shedding 18 points, while the other indexes showed slightly larger percentage declines. Now Mr. Market has to make up his mind. Does he run right back up to the February highs, or does he make a tactical retreat and test the March 16 lows for this little “correction”?

I’m sure most investors would prefer the first option. It’s always more fun (for everyone but short sellers) when share prices are rising. Personally, though, I think it would be very dangerous if the market indexes were to shoot back to their 2011 peaks without taking enough of the “foot soldiers” (individual stocks) along.

This type of negative divergence signaled the major top in the summer and fall of 2007. It was also present at other big-time market tops like 1998 (just before a 19% drop in the S&P), 1990 (a 20-percenter) and 1987 (a 33% screamer). I certainly don’t want to see that. I would much prefer a pullback to the vicinity of the March 16 lows, perhaps undercutting them by a small margin. That would allow the market to form a broader base and build up the energy for a truly explosive move to the upside. As usual, though, we’ll let the ticker tell the tale.

Dividend Stocks to Buy Now

Meanwhile, there have been some interesting developments among the dividend stocks we’re following.

AT&T Moving Away From the Buggy Whip

On Monday, AT&T (NYSE: T) announced its head-turning $39 billion bid for T-Mobile. Wireless rival Sprint Nextel (NYSE: S) is screaming bloody murder, so you can safely conclude the deal gives AT&T some important competitive advantages.

On the other hand, I’m less thrilled about the price: 7.1 times EBITDA (T-Mobile’s earnings before interest, taxes, depreciation and amortization). T itself is trading at 5.9 times EBITDA, so management will have to swing the cost axe hard to make the numbers work.

All in all, I’m willing to accept the terms because, by purchasing T-Mobile, AT&T will shrink the obsolescent local wireline business to less than 15% of sales. Sometimes, to escape a technological trap, you have to fork over big bucks. I’m sure the buggy-whip makers wished they had bought a car company — almost any car company, at almost any price — around 1903.

In short, I view this transaction as a franchise saver rather than a franchise builder. Buy T at $29 or less.

BK Raises Dividend, But Not Enough

Elsewhere on the Street, Bank of New York Mellon (NYSE: BK) raised its dividend 44% Monday morning, from 9 cents quarterly to 13 cents. I applaud the step, of course; however, I think BK could have been more generous. (Other investors apparently agree. The shares gained only 7 cents in Monday’s session.) Perhaps CEO Bob Kelly will push through a second dividend hike later in the year, but he lost an opportunity to bowl investors over. Still, I think BK is a buy at $29 or less. From here, I’m projecting a total return (capital appreciation and dividends) of 20% or more in the next 12 months.