1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Robert Abbott
Robert Abbott
Articles (814)  | Author's Website |

AT&T: A Higher-Than-Average Yield With Relative Safety

For investors who want more than a bond yield, but without taking much risk

June 25, 2020 | About:

AT&T Inc. (NYSE:T) is now among the stocks on the High-Yield Dividend Screener & High-Dividend Yield Stocks in Guru's Portfolios.

This GuruFocus screener identifies stocks owned by the investing gurus and with a dividend yield of at least 4%. AT&T makes the cut on guru portfolios because it was owned by 20 of the investing giants at the end of the first quarter of 2020, and because its current yield is 6.97%.

In its most recent 10-K, filed on Feb. 20, the company described its origins this way: AT&T, formerly known as SBC Communications Inc. (SBC), was formed as one of several regional holding companies created to hold AT&T Corp.s (ATTC) local telephone companies. On Jan. 1, 1984, we were spun-off from ATTC pursuant to an anti-trust consent decree, becoming an independent publicly-traded telecommunications services provider. At formation, we primarily operated in five southwestern states.

Since 1984, it has merged with and acquired several other wireline and wireless companies, making it a big player in the telecommunications industry. In addition, it acquired DIRECTV in 2015 and Time Warner Inc. in 2018, making it an entertainment powerhouse as well.

Its full-year 2019 consolidated results featured these line items:

  • Consolidated revenues: $181.2 billion.
  • Cash from operations: $48.7 billion.
  • Diluted earnings per share: $1.89.
  • Adjusted earnings per share: $3.57 per share, compared to $3.52 in the prior year.
  • Capital expenditures: $19.6 billion.

Both its revenue per share and earnings per share have dropped off in the past two years, as shown in this 10-year chart:

GuruFocus AT&T revenue per share and earnings per share chart

Despite these numbers, AT&T reportedin its fourth-quarter 2019 earnings release: for the full-year, the company met or exceeded its 2019 guidance and delivered record operating and free cash flow.

Its market cap on June 25 was $215.53 billion.

And what are we to think of AT&T as a dividend stock for income investors?

Analysis

We will analyze the companys dividend using the line items in the Dividend & Buy Back section of the AT&T summary page:

GuruFocus AT&T dividend and buy back table

Dividend yield

With a yield of almost 7%, it will attract the attention of many income investors. It is significantly higher than the average or median of other S&P 500 stocks.

But there is also a history here, which we will address in the dividend growth section.

Dividend payout ratio

The ratio shown in the table is 1.05 of 105% of earnings. That would be a dangerously high level of payout, but it also is inaccurate.

The company posted this table in its fourth-quarter earnings release, showing the actual range of payouts for the most recent fourth quarters and full years:

GuruFocus AT&T free cash flow and dividends table

With a payout ratio ranging between 51% and 60%, the AT&T dividend is sustainable. It leaves ample cash flow for the company to invest in new projects that could fuel future growth.

Dividend growth rate

Dividend growth at AT&T fits the slow and steady mold, with consistent 2% per year increases. This 35-year chart emphasizes how consistent that growth has been:

GuruFocus AT&T dividends per share chart

Because it has increased its dividend every year for 25 years, the company belongs to an exclusive group of stocks known as the S&P Dividend Aristocrats. These are "best in class" companies for income investors.

Forward dividend

This yield rate is based solely on the last dividend payment, while the conventional rate is based on the last four payments.

Because the forward yield is higher than the conventional yield, we know there has recently been an increase in the dividend payment.

Five-year yield on cost

The yield on cost is 7.77%.

It is based on the assumptions that an investor will buy and hold the stock for five years and that the company will continue to increase its dividend at the same rate as it has done for the past five years.

Think of it as a base for estimating future returns. To it, investors would add estimated capital gains and improvements in valuations based on share buybacks.

Of course, companies can cut their dividends and render the estimate useless, but that seems unlikely in the case of AT&T with its long history of growth. However, you wouldnt want to count on capital gains given its price history over the past decade:

GuruFocus AT&T share price chart

Share repurchases

According to the table, the company has a negative buyback number, 5.7, which would indicate the company has been issuing more shares than it has bought back. That can be attributed to new shares issued to fund the Time Warner acquisition.

In 2019, though, AT&T did embark on buybacks, spending $2 billion to retire 51 million common shares. And in its since-withdrawn guidance for this year, it announced it would allocate between 50% and 70% of its post-dividend free cash flow to retire about 70% of the shares it issued for Time Warner.

Until the future of the economy clears up, which will have to wait until there is better news about the pandemic, share buybacks will be on hold.

Gurus

As noted, 20 of the gurus had holdings in AT&T at the end of the first quarter. Jim Simons (Trades, Portfolio)' Renaissance Technologies had the biggest stake with 10,244,486 shares. They represented 0.14% of AT&Ts common stock and 0.29% of his portfolio. Pioneer Investments (Trades, Portfolio) held 6,498,728 shares and Paul Singer (Trades, Portfolio)'s Elliott Management had 5,000,000 shares.

Since June 2018, the gurus have been doing more selling than buying:

GuruFocus AT&T guru buys and sells

Conclusion

For income investors, AT&T is a relatively safe harbor in a turbulent ocean of economics.

Given the consistency of its dividend growth rate, investors can be reasonably certain that the five-year yield on cost projection is reasonable. Therefore, they can expect an average annual return of 7.7% based on the current and projected yields and look at any capital gains or share buybacks as a bonus.

In an era of low-interest rates, AT&T offers something approximating bond safety, but with a much higher return.

Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.

Read more here:

Not a Premium Member of GuruFocus? Sign up for afree 7-day trial here.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


Rating: 5.0/5 (1 vote)

Voters:

Comments

Please leave your comment:



Performances of the stocks mentioned by Robert Abbott


User Generated Screeners


pjmason14Momentum
pascal.van.garsseHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)