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.
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
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.
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%:
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.
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)
AT&T fails the following of my selection criteria:
- 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%)
Based on these statistics, AT&T earns 3 out of a possible 7 stars: (***––––)
Other ratings for AT&T
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.
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