A&T Stock Looks Intriguing At 6% Dividend Yield

AT&T (T) stock has long fascinated me. It’s the staple of nearly every income investor’s portfolio. And for good reason. If you get your hands on a meaningful block of AT&T stock early enough in your life, you can have a whole lot of fun with it.

Ten years ago, a mere $20,000 investment could have gotten your hands on 1,000 shares of T. Since that time, AT&T has paid out $19.80 per share in dividends. If you paid $20 per share, you have essentially gotten your investment back in a decade of your life without any need to reinvest.

That has tremendous utility, either to supplement your lifestyle or to provide a regular, dependable dividend stream to make future investments.

You may be thinking, “Okay, that ten-year date came from 2008, the year of the last recession. Surely that is a cherry-picking comparison that is of limited use today?”

Nope.

Back in 2008, AT&T traded at 10x earnings and yielded 4.8%. As of May 18, 2018, AT&T trades under $32 while paying out $2 in dividends while expecting to earn about $3.45 per share in profits for a P/E ratio that hovers near 9x earnings.

Everyone is worried about whether or not the Time Warner deal goes through and that “uncertainty” has punished the price down. To me, uncertainty should only weigh on the valuation of a business if the future looks dramatically different based on the potential outcome.

If the merger goes through, AT&T will pick up some nice content properties, but will dilute its shareholder base and take on debt to do so, so the gains will move in lockstep with the debits and you will see 3-4.5% annual earnings per share growth. Meanwhile, if the merger doesn’t go through, AT&T will have to pay a break-up fee of $500 million, which is insane, but the five-year projection would still be annual earnings per share growth in the 3-4.5% range.

The real intriguing aspect of AT&T is DirecTV Now. It is AT&T’s two-year old TV internet streaming service that now has 1.2 million subscribers (about 18% more than last year) and boasts profit margins of 24%, which is a superior use of capital to the typical amount of profit that AT&T earns on each dollar of revenue (across the company, AT&T earns 13.1% net profit margins). Sure, this profit margin would likely increase if CNN, HBO, and TNT were added to AT&T’s overall portfolio via the Time Warner merger, but this segment is doing just fine growing independent of it.

AT&T generates $160 billion in annual revenue and has wildly large capital expenditures (billions and billions per year) while carrying a $164 billion debt load and a $59 billion pension that only has $45 billion currently funded. Those factors mean that earnings per share growth is destined to hover in the 3-4.5% annual range for a very long time.

That type of earnings per share growth can facilitate your family’s wealth building provided that you get the price of the stock right from the onset. If you buy AT&T stock today, while there is uncertainty about the Time Warner deal, you are being well-compensated for that “risk”, which isn’t really a risk at all to the extent that the earnings per share growth projections for AT&T don’t change either way because the costs of the transaction run parallel with its likely benefits.

Over the next ten years, AT&T is likely to pay out close to $30 in cumulative dividends. If you invest $10,000 into the stock, you have a high probability of collecting $9,200 to $9,600 in cash payouts, based on current earnings quality and AT&T’s historical precedent. For the investor that prizes high current income and a stable income payout at that, AT&T is locked and ready to provide the benefits that have been traditionally associated with it.

So you get a 6.2% dividend yield, 3% to 4.5% annual growth, and possibly an extra 1% from price appreciation. It is weird to write this about a slow-growing company during a general prosperous economic backdrop, but for someone that buys AT&T stock today, the likely five-to-ten year returns are 9.2% to 11.7%. If you are capable of buying AT&T stock in a tax-advantaged account, you could fully reap those rewards.

This is a publicly available version of an article shared with The Conservative Income Investor’s Patreon followers on May 18, 2018.