Feb 2, 2015: Bought 75 shares of T at $33.21 per share.
Incorporated on October 5, 1983 and based in Dallas, Texas, AT&T Inc (NYSE:T) is a holding company providing telecommunications services in the United States and internationally. Services include wireless communications, local exchanges, long-distance services, data/broadband and internet services and many other services.
AT&T is a Dividend Champion with a track record of 31 consecutive years of dividend increases. The company pays quarterly dividends of 47¢ per share in the months of February, May, August and November.
AT&T is an existing holding. I first bought shares of AT&T on 23 October 2014, picking up 75 shares at $33.64 per share and at an initial yield on cost (YoC) of 5.47%. This time, my initial YoC is 5.66%.
With this buy, I'm averaging down to a per share price of $33.43. My two entry points are indicated in the chart below. In the lower chart, it is evident that AT&T has underperformed the S&P 500 since late November 2014. I'm not too concerned about AT&T's performance relative to the broader market, though. As a dividend growth investor, I'm primarily interested in AT&T's dividends and the company's track record of raising its dividend every year.
Source: Scottrade
Incorporated on October 5, 1983 and based in Dallas, Texas, AT&T Inc (NYSE:T) is a holding company providing telecommunications services in the United States and internationally. Services include wireless communications, local exchanges, long-distance services, data/broadband and internet services and many other services.
AT&T is a Dividend Champion with a track record of 31 consecutive years of dividend increases. The company pays quarterly dividends of 47¢ per share in the months of February, May, August and November.
AT&T is an existing holding. I first bought shares of AT&T on 23 October 2014, picking up 75 shares at $33.64 per share and at an initial yield on cost (YoC) of 5.47%. This time, my initial YoC is 5.66%.
With this buy, I'm averaging down to a per share price of $33.43. My two entry points are indicated in the chart below. In the lower chart, it is evident that AT&T has underperformed the S&P 500 since late November 2014. I'm not too concerned about AT&T's performance relative to the broader market, though. As a dividend growth investor, I'm primarily interested in AT&T's dividends and the company's track record of raising its dividend every year.
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After dropping below 5% in 2012, AT&T's dividend yield has slowly worked its way back up to about 5.5%. Some recent price strength has pushed it down to 5.44%.
AT&T's dividend growth rate is slowing down. While its 10-year dividend growth is a respectable 4.1%, the latest increase was only 2.2%:
Dividend Growth Rate of AT&T
| 1-Year | 3-Year | 5-Year | 10-Year |
2.2%
|
2.3%
|
2.3%
|
4.1%
|
The following chart shows AT&T's dividend payments and earnings per share over the last 10 years. The company's dividends are growing steadily, but its EPS is erratic.
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In fact, AT&T's dividend payout ratio is high at an unsustainable 1.6, as seen in the following chart:
An investment in AT&T 10 years ago would have doubled your money, while YoC would now be 8%. Coincidentally, the 10-year compound annualized growth rate also is 8%:
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Source: GuruFocus
Analysis of AT&T
My fair value estimate of AT&T is $33.95, so I bought shares at a slight discount of 2.2%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.
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AT&T passes the following of my selection criteria:
- A streak of at least 5 years of dividend increases (31 years)
- Dividend yield exceeds 2.75% (5.66%)
- Price to earnings ratio (P/E) is less than 20 (TTM 10.25x and Forward 13.05x)
- Reasonable confidence in continued dividend growth (Yes)
- Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (7.75%)
- Earnings per share (EPS) percentage payout is less than 40% (157.98%)
- Debt to equity ratio is below 50% (82%)
- 5-year CAGR is at least 10% (2.33%)
- P/E to annual EPS growth (PEG) ratio is less than 2 (2.24)
- Price discount is at least 5% of fair value estimate (2.2%)
Other ratings for AT&T
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Concluding Remarks
AT&T was the top Telecommunications sector stock in my January dashboard of dividend growth stocks with an overall rank of 15. Since then, AT&T released fourth-quarter and fiscal year 2014 earnings. Fourth-quarter results were solid, with revenues of $34.4 billion, an increase of 3.8 percent compared with the year-ago quarter. Free cash flow totaled $1.3 billion. For fiscal 2014, AT&T's revenues totaled $132.4 billion, an increase of 2.8% compared with total revenues for fiscal 2013. Free cash flow for fiscal 2014 totaled $9.9 billion.
AT&T is in the midst of several strategic initiatives and pending acquisitions, including DIRECTV and Nextel Mexico. Excluding these, in 2015, AT&T expects to continue revenue growth, adjusted EPS growth in the low single digit range, expanding margins, and improving free cash flow and dividend coverage.
My main motivation for adding shares is AT&T's dividend and its track record of raising dividends. Although dividend growth barely beats inflation, AT&T's yield is exceptional. The company has a healthy dividend payment policy and I believe the dividend is sustainable, given AT&T's ability to generate healthy free cash flow.
75 shares of T adds $141.00 to DivGro's projected annual dividend income.
Thanks for reading!
Excellent buy and great write-up! I'm a fan of Seeking Alpha and your research is definitely on par or better than many of the published articles there. T will be among the next stocks that I consider. I don't yet have a position in it, but it would be nice to recoup some of the expenses from cell phone, Internet, and TV in the form of dividends.
ReplyDeleteThanks for commenting, Scott, and for the compliment! AT&T is a solid dividend growth company, with an excellent yield and a dividend growth rate essentially matching inflation. I think its a good stock for a DG portfolio, provided you counterbalance it with some solid dividend growers.
DeleteGood luck and take care!
Hey Ferdi,
ReplyDeleteNice analysis and great buy.
AT&T is amongst the few stocks I call my fundamentals. These are the companies I started this journey with. They are all Aristocrats with a nice yield and/or growth potential.
Best wishes,
DfS
Thanks Dfs -- with its excellent yield and dividend record, AT&T certainly is one of the great choices for dividend growth investors. Some will object to the slow pace of growth, but, in my view, the yield more than compensates. I counterbalance my AT&T holding with other dividend growth stocks that grow faster but yield less.
DeleteFerdi,
ReplyDeleteLooks like you were able to buy in to AT&T at a good price. I'd like to add more to my position but need to do a lot more research on what the DirecTV purchase can add to their operations. I expect it to do well but need to learn more about it and see what management has to say. If they could start giving more than the token $0.01 increases I'd be much happier with AT&T. Hopefully DTV can add that as well as their car connectivity that they seem to have cornered as well. I don't expect 10% annual growth or anything but if it could bump back up to the 4-6% that would be awesome.
Hi Pip -- thanks for stopping by. I'd be interested to hear your take on the DirecTV purchase and the potential impact on AT&T and it's dividend. As I pointed out above, I'm not so concerned about the token penny increases. The dividend yield more than compensates, in my view. Take care!
DeleteReally like this purchase, FerdiS. I am bullish on T as well and want to add to my positions. The yield is juicy and its hard to beat by others. I think lot of ppl are discounting it off as a stagnant company, but I think its got a lot to give. I expect the rev to grow over the coming years.
ReplyDeleteBest wishes
R2R
Hi, R2R -- thanks for commenting. Considering what AT&T has done lately, I think its unfair to discount it as stagnant. In fact, I think they're positioning themselves for significant growth (DirecTV, Nextel Mexico, huge FCC spectrum auction investment, etc.), which should translate into sustainable dividend payments and, who knows, better than just token dividend increases...
DeleteEvery time I've got to snag T or VZ the price isn't where I want it to be. Both in December, and a month ago, I've missed some decent entry points on these two telecom giants. Something to be rectified this year if at all possible.
ReplyDeleteThanks for sharing your research on the fundamentals. The rest of North America (Mexixo especially) holds huge potential depending on how the acquisitions shake out.
I feel like that with several stocks -- but it is important to wait for great entry points. KO and PG comes to mind. Patience is key, as you know. My discount to fair value on AT&T is a little less than the 5% I usually seek... in this case I wanted to get in before AT&T's share price jumped above my fair value again, which it did!
DeleteThanks for commenting!
I know T has been very popular among the dividend blogging community because of its enticing initial yield. Though dividend growth is slower you still are getting a pretty nice total return over time. Curious to know if VZ will be added as well. Thanks for sharing.
ReplyDeleteI haven't done my monthly analysis yet, so I can't comment on VZ's prospects. However, I'm not currently looking to add more Telecommunications sector stocks, so unless VZ has very compelling stats, I probably won't add it anytime soon.
DeleteIt's a nice stable company, but I don't see it like a growth dividend. Adding to your holdings at fair price is always a good option though so congrats on that!
ReplyDeleteAT&T is a dividend grower -- its been growing the dividend for 31 consecutive years.
DeleteNow if you object to the recent anemic 4¢ a year increases, I would understand. Sometimes, established dividend growers with high yields need to temporarily reduce increases to afford strategic repositioning. Such growth could eventually result in the resumption of larger dividend increases.
I was referring to the dividend growth rate that is low compared to dividend stocks I normally picked. Of course this stock has grown its dividend for an impressive number of years (31 as you pointed out) and that is why I wrote it was a nice stable one! ;-) Yes, the resumption of larger dividend increases is more than possible so no doubt it was a good move to add some for you!
DeleteAah, thanks for the clarification :-)
DeleteHi Ferdi,
ReplyDeleteThank you for writing this detailed analysis.I like AT&T for the long term too although they pay a little more of my annual dividends than I'd like due to their high yield so I've held off purchasing more for the time being.
Their payout ratio based on EPS might be a little misleading - payout based on cash flow is better but still high (96%) and they do have a healthy cash balance. I'm sure they're under a lot of pressure to maintain their dividend levels, hence the minimum increases.
I must say though that it's particularly nice receiving their dividend payments in the same month that they ask me to pay my phone bill!
Best wishes,
-DL
Hi DL -- thanks for commenting and for clarifying the payout ratio issue. I see AT&T's minimal increases in a positive light: the company understands how important dividend growth is for DG investors, yet it also needs to ensure future growth prospects through strategic repositioning and acquisition activity.
DeleteFor the time-being, I'm happy with the size of my AT&T holdings, so I won't be adding more shares anytime soon.
Take care!
Excellent buy at great timing. AT&T is consecutive dividend growth proves its solid performance over the years and will continue! Thanks for sharing your detailed analysis Ferdi. I am always grateful to read your postings!
ReplyDeleteBSR
Thanks for your kind words, BSR! I'm looking forward to receiving my first expanded dividend from AT&T. With the yield over 5%, that's going to be a good one to get! I'm not too concerned with AT&T's slow dividend growth, as long as they continue to pay that yield and keep up with inflation, I'd be happy!
DeleteHi, would you mind to explain how did you calculate fair value of 33.95$?
ReplyDeleteThank you
This article was published in 2015. My current fair value estimate of $T is $43.
Delete