AT&T (T) is a $170 billion telecommunications behemoth with a history dating back to the invention of the telephone. The stock currently yields ~5.7%, with a large portion of the expected investment return coming from the dividend in lieu of EPS growth. EPS growth has been a paltry 1% annually over the past five years. Before the recession, AT&T was making $2.76 per share, and now only makes a little over $2.50 per share. Does AT&T make sense as an investment today?
The Business
AT&T is an integrated, diversified telecommunications giant. After their recent acquisitions of DIRECTV and a significant amount of assets in Mexico, the company has repositioned themselves away from cellular phone plans towards business, video and internet services.
Moving forward, the company anticipates leveraging its recent acquisitions to better tap growth markets both ex-U.S. and domestically.
Ownership
While the strategy shift brings the possibility of higher EPS growth, it does involve some uncertainty, especially with future integration efforts. This has helped push the short interest to historically high levels, rising ~6x in the past 12 months.
While the percentage ownership may be low, it should be noted that the CEO’s 0.1% ownership stake is still worth $65 million. Most of the upper management team has significant equity stakes in the business.
Additionally, AT&T is a small holding across many Guru portfolios.
Valuation
As the dividend is such a significant part of total shareholder return for AT&T stock, we can take the current yield and add any future EPS growth to estimate the total return of the shares. Currently, AT&T yields nearly 6%, close to historic highs.
While it has had some stumbles, the dividend payout has been remarkably consistent over the past 20 years.
Analysts are expecting 4.68% of annual growth over the next five years. If this were to happen and the P/E ratio stayed constant, investors could expect a total return of >10% (dividend yield + EPS growth).
Looking at EPS expectations for 2015, AT&T currently trades at only 13.0x P/E for next year’s earnings. This should help AT&T avoid any multiple contraction that would diminish investor returns on the stock.
Conclusion
Right now, AT&T stock looks to be priced for a ~10% annual return. With the market nearing all-time highs and a stretched valuation as a whole, investors may find safety in the shares of this undervalued telecom giant.
For more ideas like this one, check out GuruFocus’ High Yield Dividend Stocks Screener or the rest of R. Vanzo’s Articles.
