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Why AT&T Is A Top Dividend Stock

Today a guest post by Bob Ciura from Sure Dividend on AT&T.

 

Why AT&T Is A Top Dividend Stock

Investors looking for the best returns over the long-term should focus on the highest-quality dividend growth stock. At Sure Dividend, we believe investors looking for quality dividend growth stocks should consider the Dividend Aristocrats. The Dividend Aristocrats are a group of 64 companies in the S&P 500 Index that have raised their dividends for at least 25 years in a row.

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Even better, investors can further refine their search to focus on Dividend Aristocrats with above-average dividend yields and growth potential, that are trading at reasonable valuations. An example of this is AT&T Inc. (T), which we believe is undervalued, with catalysts for future growth. AT&T also has a high dividend yield above 5% right now, making it one of our top dividend stock picks today.

 

Business Overview & Recent Earnings Report

AT&T is the largest communications company in the world, operating in four distinct business units: AT&T Communications (providing mobile, broadband and video to 100 million U.S. consumers and 3 million businesses); WarnerMedia (including Turner, HBO and Warner Bros.); AT&T Latin America (offering pay-TV and wireless service to 11 countries); and Xandr (providing advertising). The company generates $180+ billion in annual revenue and has a market cap of nearly $270 billion.

Last year was another year of steady financial performance for AT&T. In the 2019 fourth quarter, the company generated $46.8 billion in revenue, down from $48.0 billion in Q4 2018, as growth in domestic wireless services and business services partially offset declines in domestic video, legacy wireline services and WarnerMedia. Although revenue declined for the quarter, adjusted earnings-per-share increased 3.5%, reflecting profitability gains for the company.

Despite the revenue dip in the fourth quarter, 2019 was a solid year overall for AT&T. For the year AT&T generated $181.2 billion in revenue, up 6.1% led by a full year of Time Warner and growth in domestic wireless services. Adjusted earnings-per-share increased 1.4% for the full year.

2019 was an important year for another reason, which was AT&T’s transformation into a content giant. The company paid a hefty sum for Time Warner, but last year AT&T made important strides in reducing debt. AT&T reduced its debt-to-EBITDA ratio to 2.5x in 2019. All of these steps taken last year indicate 2020 and beyond should have continued growth in store for AT&T.

 

Future Growth Catalysts

AT&T expects to continue growing modestly in the years ahead. The company recently updated its 2020 outlook and 3-year financial guidance and capital allocation plan. For 2020, AT&T the company reiterated its expectation of revenue growth of 1% to 2%, adjusted earnings-per-share of $3.60 to $3.70 and a dividend payout ratio in the low-50% range. By 2022, AT&T expects 1% to 2% annual revenue growth, $4.50 to $4.80 in earnings-per-share, continued dividend increases and a debt-to-EBITDA ratio of 2.0x to 2.25x.

Acquiring Time Warner is a major boost to AT&T’s future growth. In the era of “cord-cutting”, cable and satellite TV providers are under attack. The threat of cheaper Internet streaming options is a real risk to traditional cable service, which explains why AT&T made such a huge splash in content. The ~$100 billion acquisition of TimeWarner instantly gave AT&T a huge foothold in content, including premium channel HBO, multiple cable networks, and a movie studio.

Content is likely to be a major growth contributor, as will 5G service. AT&T management expects 5G device adoption to help the company reach its growth objectives for 2020-2022. In December, AT&T rolled out its “low band” 5G service to 10 new markets, and it maintains the goal of reaching nationwide 5G coverage in the first half of 2020.

These growth investments will allow AT&T to continue generating the earnings and free cash flow necessary to maintain its hefty dividend and increase the dividend each year.

 

Valuation & Dividend Analysis

AT&T is a reasonably valued stock, with a P/E ratio of just over 10 based on expected 2020 adjusted EPS of $3.65. AT&T is much cheaper than the broader market, and its steady growth and strong business model could justify a higher valuation multiple. During the past decade shares of AT&T have traded with an average P/E ratio of around 12 to 13 times earnings.

An expansion of the P/E multiple to its historical average would have the effect of boosting shareholder returns. For example, a P/E ratio of 12 would imply a fair value price of approximately $44, compared with the current share price of $37.

In addition, AT&T’s future earnings growth will boost shareholder returns. Even if the company continues to grow earnings at a modest low single-digit annual pace, this will provide positive returns to shareholders. Lastly, AT&T’s high dividend yield of 5.6% will add to shareholder returns. AT&T is a highly attractive income stock, as the S&P 500 Index has an average dividend yield below 2% right now. By comparison, AT&T is extremely appealing for investors looking to generate higher dividends, such as retirees.

AT&T has increased its dividend each year for 36 consecutive years, including a 2% increase in December 2019. The company has a forward dividend payout ratio of approximately 57% for 2020, which indicates a secure dividend payout that has room for future increases on an annual basis. AT&T’s dividend increases will likely be modest, in the 1% to 2% range per year, but this at least helps keep up with inflation while providing investors with higher income.

 

Key Takeaways

AT&T is a reliable dividend stock. It has increased its dividend for over three decades, which has earned it a place on the list of Dividend Aristocrats. It is also attractive for income investors, such as retirees, due to its high yield of 5.6%.

While there are never any guarantees when it comes to the stock market, AT&T’s strong business model and valuable content properties gives the company significant growth potential for the future. In the meantime, the stock trades for a reasonable valuation, and pays investors a high yield. Overall, we view AT&T as a buy for income investors.

 

BIO: Bob Ciura is Senior Vice President of Sure Dividend. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.

 

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