Charles Lewis Sizemore, CFA

About the Author Charles Lewis Sizemore, CFA

Charles Lewis Sizemore, CFA is the founder and principal of Sizemore Capital Management LLC, a registered investment advisor. Charles has been a repeat guest on CNBC, Bloomberg TV and Fox Business News, and has been quoted in Barron’s Magazine, The Wall Street Journal and The Washington Post. He is a contributor to Forbes Moneybuilder, and has been featured in numerous publications and well-reputed financial websites, including MarketWatch, SmarterAnalyst,, InvestorPlace, GuruFocus, MSN Money, and Seeking Alpha. He is also the co-author, along with Douglas C. Robinson, of Boom or Bust: Understanding and Profiting from a Changing Consumer Economy (iUniverse, 2008). Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. He also maintains the Chartered Financial Analyst (CFA) designation in good standing.

Here’s Why I Hate AT&T (T) Stock

I’ll be blunt: I hate AT&T (NYSE:T).

But before you chime in with an enthusiastic “me too,” I’m not referring to AT&T’s mobile phone service or home internet service (both of which I dumped years ago for being overpriced).

I’m talking about AT&T stock. Though to be fair, I’m not any more fond of Verizon, Vodafon or any of the other large telecom stocks.

As you might know, I’m Dent Research’s “income guy.” I focus on retirement issues and income stocks in my Peak Income newsletter.

Given that I recommend high-yield stocks, you might assume that high-yielding telcos like AT&T – especially with its merger with Time Warner (slowly) pushing forward – would be right up my alley.

AT&T sports a dividend yield of 6.1%, making it one of the highest-yielding stocks in the S&P 500. It’s also raised its dividend for 34 consecutive years and counting. That’s not a bad run.

So, if it pays a nice dividend and has a history of raising it… what’s not to like?

Let’s start by listing a few criteria I like to see in a dividend stock:

  1. The company should have competitive “moats” around it that protect it from competition. Companies in low-margin, hyper-competitive industries tend to be risky payers that cut their dividends when times get tough.
  2. The company should also be “future proof,” or as close to future proof as possible. You don’t want its business model disrupted by new technology.
  3. Demand for the underlying products should be growing or at least very stable.
  4. The company should pay out a relatively low percentage of its earnings as dividends. This gives the company a cushion in the event that earnings fall a little short one year. (Certain stocks, such as MLPs and REITs, are exceptions to this rule. Tax laws require them to pay out substantially all of their net income, and depreciation and other non-cash expenses tend to skew the numbers and make them hard to compare.)

So, how does AT&T stack up?

Well, to start, AT&T has nothing in the way of competitive moats. Not only does the castle lack a moat, the guards left the drawbridge down and left for lunch.

You can change mobile carriers in a matter of minutes now, and contracts are less of an impediment to leaving than they were in the past. Led by T-Mobile, virtually every carrier now advertises no-contract plans.

And its not just mobile phones. These days, it’s generally pretty cheap and easy to change your cable TV or home internet provider. So whatever moats AT&T might have enjoyed a decade or two ago have long since dried up.

Is AT&T future proof?

Not exactly.

Much of AT&T’s infrastructure consists of legacy copper wiring originally used for landline phones, and the company constantly is upgrading its mobile network to stay competitive. AT&T is stuck on a technology treadmill, and it has to keep running… or risk getting thrown off.

But isn’t demand for its services rising, at least? Yes and no.

Yes, we all use more data today than we did a few years ago, and that trend isn’t likely to reverse any time soon.

But the smartphone market is now saturated in every developed country and not far from saturation in many emerging markets.

Everyone already has a smartphone. So, the only way to gain market share is to poach customers from another carrier, which means lowering the price and offering incentives… both of which lower margins.

So, while demand for service (particularly data) is growing, that growth is not leading to higher revenues or profits. And that’s just mobile data.

Home internet is a saturated market, and paid TV is actually shrinking due to cord cutting. All of AT&T’s businesses are mature, no-growth businesses at this point.

But the dividend payout ratio is low, right?

Sort of.

AT&T’s dividend payout ratio looks low, at 40%. But this headline number misses the fact that net income was inflated last year due to corporate tax cuts passed in December.

AT&T realized a $20 billion extraordinary tax benefit, which will not be repeated.

Between 2014 and 2016, the payout ratio averaged 107%, meaning the company paid out more than it was earning.

Lower tax rates going forward will help, of course. But in the first quarter of this year, the payout ratio was 67%.

That’s not a range that puts the company at immediate risk of cutting the dividend, of course.

But in order for AT&T to safely raise it from here, they need growth. And free cash flow has barely budged over the past decade.

AT&T changed its business model by merging with content creator Time Warner, the parent of HBO, CNN and a host of other networks.

But given the glut of content these days and the unrelenting competition from Netflix, Amazon, and other up-and-coming creators, its’s hard to see this being the growth vehicle AT&T needs.

And all of this assumes the government doesn’t torpedo the deal, which it has indicated it intends to do.

Bottom line, don’t expect to see AT&T in my Peak Income portfolio any time soon. We can do better.

Incidentally, I’ll be speaking at Dent Research’s annual Irrational Economic Summit October 25th to 27th in Austin, Texas, and I’ll be giving my thoughts the best places to hunt for income in this environment.

I’ll share some of my favorite investments… and, like I am today, I’ll tell you which ones – like AT&T – to avoid.

Apart from speaking, I’ll also be making the rounds, talking to the attendees. If you want to pick my brain or just enjoy a beer with me, this is a good chance.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed.


Investment Strategy: The Daily Insider

We discovered a huge alpha between an insider transaction and the market’s reaction to it. After back testing millions of insider transactions, we were sure of this model’s performance. Interestingly, our daily long picks managed to return profits even in bear markets. To learn more about some of our best trading tips in Smarter Analyst’s Daily Insider newsletter click here.


Stay Ahead of Everyone Else

Get The Latest Stock News Alerts