AT&T - Not Grandma's Phone Company Anymore
With "Brexit" pushing Treasury yields to historic lows, and the prospect of an aging bull market, investors are increasingly looking to dividend stocks as a safe haven for protecting scarce returns. Known for their capacity to weather economic storms, dividend-paying companies, especially those with strong cash positions and a history of increasing their dividends, are stalwarts during times of economic and market uncertainty. However, low bond yields have driven up stock prices, which have driven down dividend yields, and slower economic growth could be a drag on dividend increases in the future.
Indeed, in the year 2016, it's almost a non sequitur to talk about a stock that has both a high yield and actual growth potential. AT&T, however, just may be of one of those companies. Here are 4 reasons why:
AT&T vs S&P500
1.) Growth Potential:
Already a dominant player in the wireless network market, AT&Ts acquisition of DirectTV offers several avenues for growth. Not only does it give the company more opportunity for cross-selling services, it opens the door to the lucrative South American market which has been a major factor in DirectTV’s growth in recent years. DirectTV also enhances AT&T’s digital content distribution which will lead to its introduction of video streaming programming later in 2016. In addition AT&T is investing heavily in the ever growing Mexican high-speed mobile internet market with the prospect of adding 100 million new consumers by 2019. Even before DirectTV, AT&T has been growing it share of the business market with its mobility and secured cloud solutions.
Prior to the DirectTV acquisition, AT&T’s revenue growth rate was a paltry 1%. In time, we expect the growth rate to jump to around 5% with DirectTV on board. With annual revenues of $150 billion, that will add significantly to the company’s massive free cash flow, which topped $15 billion last year. This gain in free cash flow makes its dividend much more affordable, which increases the the probability of dividend hikes and total returns.
2.) High Dividend:
Why Dividends? Percent Of Market Returns 1940-2010
AT&T’s 48 cent dividend puts its current annual yield around 4.53%, which is more than double the S&P 500’s yield of 2.15%. Further, they’ve increased their dividend for 32 consecutive years, earning it a spot in the exclusive Dividend Aristocrats Index. One reason why we like, high, stable dividends is that over the long term it puts less pressure on price appreciation. Thus, it can provide a buffer between the investment, the markets, and overall economy. For example, if an investor buys a stock with a 5% dividend yield, and all things remain the same, the investor will receive 50% of their investment back in just dividends over 10 years. Of course, a company like that would have to perform pretty terrible to give one a negative return over that time frame.
3.) Current Performance:
In the face of stiff competition from Verizon, AT&T remains a steady performer in the wireless telecom market. Over the last 5 years, revenue and earnings growth from telecom has been relatively flat, which is to be expected from a company that more closely resembles a large utility. While T’s current ROE of 12.79% is underperforming the industry which is averaging 14.7%, it is sharply higher than the 6.4% ROE from last fall. Nevertheless, the company continues to reward its shareholders in solid total returns. Over the past 10 years the stock has returned 7.94%, outpacing the average return for the industry and the S&P 500.
4.) Future Performance:
AT&T continues to face challenges from its customer base, having recently been ranked, once again, the lowest in terms of customer satisfaction among the major carriers. It has countered that with extremely attractive offers enabling customers to buy high-end phones for next to nothing by bringing back its once popular unlimited data plan. The company has also been flexing its huge brand muscle abroad securing agreements in emerging countries such as Mexico and China that will lead to an expansion of its IP networks in these potentially high growth markets.
The major carriers all face stiff competition from new entrants into the mobile communications arena as the prospect of more VoIP-type services become more mainstream and text messaging becomes more available outside of the data control (and, therefore, the billing) of the carriers. But, of all of the carriers, AT&T may the be best positioned to withstand the onslaught of innovation. As a global provider of data services to multi-national corporations, we think it has a much broader reach than its competitors.
In Summary:
Of course, one can never be certain about any investment. And, even with the DirectTV acquisition, no one believes that AT&T will be a top performing growth stock anytime soon. However, that is not what investors expect from a company that behaves more like a utility stock. Never considered especially exciting, AT&T has been the epitome of slow and steady, and, for us, that’s just fine. - JML
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