Sunday, October 26, 2014

Recent Buy: T

Oct 23, 2014: Bought 75 shares of T at $33.64 per share.

Incorporated on October 5, 1983 and based in Dallas, Texas, AT&T Inc. (T) is a holding company providing telecommunication services in the United States and worldwide. Services include wireless communications, local exchanges, long-distance services, data/broadband and internet services and many other services. In March 2014, the company completed the acquisition of prepaid wireless provider Leap Wireless International Inc.

T is a Dividend Champion with an impressive 30-yr streak of dividend increases. It pays quarterly dividends in February, May, August and November. Initial yield on cost is 5.47%.

AT&T's stock has underperformed the S&P over the past 10 years and especially since April last year. T has a 5-year Beta averaging about 0.44.


Analysis of T


My fair value estimate of T is $35.50, so I'm buying shares at a discount of about 5%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.


T passes the following of my selection criteria:
  • A streak of at least 5 years of dividend increases (30 years)
  • Dividend yield exceeds 2.75% (5.47%)
  • Price to earnings ratio (P/E) is less than 20 (TTM 10.40x and Forward 13.08x)
  • Reasonable confidence in continued dividend growth (Yes)
  • Price discount is at least 5% of fair value estimate (5%)
T fails the following of my selection criteria:
  • Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (7.85%)
  • 5-year CAGR is at least 10% (2.38%)
  • Earnings per share (EPS) percentage payout is less than 40% (54.12%)
  • Debt to equity ratio is below 50% (91%)
  • P/E to annual EPS growth (PEG) ratio is less than 2 (2.07)
Based on these statistics, T earns 4 out of a possible 7 stars: (****---)

The following chart shows T's dividend payments and earnings per share over the last 10 years. Like most Telecommunication Services sector stocks, T's dividend growth is slow but steady. EPS is rather erratic, but generally trending up:


Other ratings for T


 Zacks Rank 3-Hold
 S&P Capital IQ's Stock Report (****-) Buy
 Thomson Reuters StockReport+  (10/10) Positive 
 MorningStar Rating (***--)
 The Motley Fool's CAPS Rating (***--)

Concluding Remarks


Recently, I compiled The Bloggers' Dividend Growth Portfolio from 61 public portfolios in my blogroll. T is the third most popular holding after McDonalds (MCD) and Coca Cola (KO). Moreover, T is the top candidate in the Telecommunication Services sector on my October dashboard of dividend growth stocks.

Last week, T reported first quarter EPS of 63¢ and missed earnings expectations by 1¢. Revenue was $33 billion, up 2.6% year-over-year but missing estimates by $240 million. The resulting sell-off has given me a good opportunity to buy shares and to secure an initial yield on cost of 5.47%.

There are several reasons to like T. The company is well-positioned for growth, with prospects ranging from subscriber additions, expanding LTE coverage, higher smartphone sales, and growing demand for mobile internet. Compared with its industry peers, T's net profit margin is 44% higher at 13.27%, while its TTM P/E is 10.4 compared with the industry average of 16.7, a discount of about 60%. Since 2013, T has returned over $50 billion to shareholders through share buybacks and dividend payments.

Of course, there are downside risks, too. The company is experiencing tough competition from direct competitors such as Verizon (VZ), Sprint (S) and T-Mobile (TMUS). Domestic operations are subject to FCC regulations and licensing. With wireless licenses generally lasting 10 years, the loss of certain licenses could have an adverse effect on T's wireless business. Spectrum crunch is a major issue and most carriers are finding it increasingly difficult to manage mobile data traffic.

Despite missing earnings estimates and guiding lower on revenue, several recent articles nevertheless promote T as a good investment at current levels, for intrinsic value, dividend yield and growth prospects. I'm happy to oblige!

This buy is my second in the Telecommunication Services sector and represents the 35th holding in DivGro.

75 shares of T adds $138.00 of expected dividend income, increasing DivGro's projected annual dividend income to $5,226.63.

Thanks for reading!

16 comments :

  1. Nice buy, DivGro. I bought T shares earlier in the summer and started with a half position. The stock price has declined since...and I will be looking to average down on the cost basis.

    Best wishes
    R2R

    ReplyDelete
    Replies
    1. Hi R2R -- Yes, I like T here and I think it would a good idea for you to average down. The first quarter earnings announcement and resulting sell-off has given me a good entry point. Long-term I think T will be fine.

      Take care!

      Delete
  2. Great buy! This is one of the funamental stocks I started this journey with :)
    You won't regret it.

    Keep up!
    DfS

    ReplyDelete
    Replies
    1. Thanks, DfS! If you bought T when you started your portfolio, I bet you're happy with how it has performed and how it is contributing to your income. I'm hoping T will continue to be a solid performer.

      Thanks for commenting!

      Delete
  3. Funny, I just looked at T and VZ myself, and decided I didn't like them. According to FAST Graphs, both grow less than inflation, even with dividends reinvested. Are you worried that your dividend income won't increase faster than inflation?

    ReplyDelete
  4. Great buy!!! You need to look at COP, CVX, OXY or HP for your next purchase. Get in on the oil dip! With a great dividend stock.

    ReplyDelete
    Replies
    1. Thank you! I already own shares of COP and CVX. OXY looks interesting, but I think I would prefer HP. Right now, I'm a little overweight in Energy, though. I'll see how things go in the next month or two.

      Thanks for stopping by!

      Delete
  5. Nice buy! I'd love to add T eventually with its nice payout and history of increases. I'm currently slowly buying VZ, but will look to add T once I get a full position. Best of luck with the purchase!

    ReplyDelete
    Replies
    1. Thanks, Special Agent Dividend! VZ is a good alternative in the Telecommunication Services sector. I'm going with T because it gave me a 5% discount to fair value opportunity.

      Take care!

      Delete
    2. BTW, I've added your blog to my blogroll. Keep up the good work and consider making your portfolio public. That's how others learn best, in my view...

      Delete
  6. Nice buy DivGro. We own AT&T in two separate portfolios. From our experience, not too much growth with T but the dividends are fairly solid. At the recent prices, you got a good deal my friend. :)

    Cheers to nice yields and continued payouts! AFFJ

    ReplyDelete
    Replies
    1. Hi AFFJ! Agreed -- AT&T has almost no growth, yet it is yielding almost 5.5%. Assuming it continues to grow at the anemic rate of 2.38%, it will take 27 years to reach a yield on cost of 10%. On the other hand, it will take only 16 years to reach 100% payback.

      Of course, I'm hoping that AT&T starts growing at a faster rate than 2.38% and that dividend growth follows suite. I won't entertain many more stocks like AT&T in my portfolio, but a handful is OK.

      Cheers!

      Delete
  7. AT&T is a good price right now and I would get some more. Agreed that AT&T positions are for the stable dividends and not for the growth (as there is virtually none). I unfortunately already have a position and don't plan to add more until I get my other sectors to their target weights.

    ReplyDelete
    Replies
    1. Thanks for visiting, Young Dividends! It makes sense to diversify first before adding more shares of T. I had a quick look at your blog. Nice blog and some good links worth visiting, especially the backtesting ones. Keep up the good work!

      BTW, I added you to my blogroll -- thanks for making your portfolio public!

      Delete
  8. Thanks for sharing your recent buy with us. I know that the telecom sector is quite popular among the DGI community for its generous yield. I'm curious why you went with T versus VZ with this current buy.

    ReplyDelete
    Replies
    1. Hi DivHut -- T was the telecom sector winner on my October dashboard, just beating out VZ. With T's price dipping after earnings came out, I grabbed the chance to pick up shares at a 5% discount to my fair value. T and VZ both scored 4 out of 7 stars. VZ has a better PEG ratio, but T was available at a better discount. This weekend I'll update the dashboard -- with T in the portfolio now, VZ would probably top the telecom sector...

      Delete

Contact Form

Name

Email *

Message *

Follow by Email