Updated April 29, 2021 by Bob Ciura
AT&T (T) is a widespread stock among high-income investors for good reason. The stock boasts a high dividend yield of over 5% and a long history of steady annual increases.
The company has increased its dividend payout for 36 consecutive years, making it a member of the Reputable Dividend Aristocrats, a group of S&P 500 stocks with at least 25 consecutive years of dividend increases.
Including AT&T, there are currently 65 Dividend Aristocrats. You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with key metrics) by clicking the link below:
AT&T is a strong company with a leadership position in several areas of the telecommunications industry. It also builds on a key growth catalyst, the massive acquisition of Time Warner.
AT&T continues to count among the hundreds of stocks in our coverage universe and also among the Dividend Aristocrats. We believe the stock will remain a buy for 2021 and beyond.
AT&T dates back to 1876 when Alexander Graham Bell invented the first version of the telephone. In its current form, AT&T is the result of a jumble of mergers and spin-offs that have taken place since 1984 when the former AT&T spun off its local telephone operations but retained its long distance, research and development, and manufacturing segments. This resulted in SBC Communications and with it the modern AT&T.
SBC acquired several smaller telecommunications companies, including what was left of AT&T in 2005, creating the company we know today. Since then, AT&T has diversified away from phone service with the DirecTV acquisition in 2015 and the acquisitions of AppNexus and Time Warner Inc. in 2018.
Today AT&T is one of the largest communication companies in the world three Business areas: AT & T. Communication (provision of mobile telephony, broadband and Video too more than 100 million US consumers and nearly 3 million Company), WarnerMedia (including Turner, HBO, Warner Bros. and Xandr) and AT&T Latin America (offer payment– –TV and wireless service to 10 Countries). The Companies to generated $172 Billions in revengeue in 2020.
AT & T’s market cap is now nearly $ 220 billion, making it a mega-cap stock.
The company has been generating steady profits and strong cash flow for many years and has positive growth prospects mainly due to the acquisition of Time Warner.
April 22ndnd, 2021 AT&T reported the first quarter 2021 results for the period ended March 31st, 2021. For the quarter the company Realized revenue of $ 43.9 billion, up 2.7% from $ 42.8 billion in Q1 2020. Higher mobility and WarnerMedia revenue More to offset declines in domestic video, business wireline, and in Latin America.
Reported net income was $ 7.5 Billion, or $ 1.04 per share. Adjusted the result– –Per– –The stock was $ 0.86 compared to $ 0.84 a year earlier Quarter.
Source: Investor Presentation
AT&T has also updated its outlook for the full year 2021 and continues to expect this 1% sales growth, adjusted earnings– –Per– –Share with Be stable with 2020 and a dividend payout ratio in the high range– –50% range
AT&T continues to pay off the heavy debts it has incurred in taking over Time Warner. The company ended 2020 with a net debt to EBITDA ratio of 3.1x. This rate fell 3.0 times in the first quarter of 2021. AT&T maintains a target leverage ratio of 2.5x for 2024.
Aggressive debt repayment is especially important to AT&T as the company has raised massive debt in recent years to fund its massive Time Warner acquisition as well as other bolt-on deals.
Source: Investor Presentation
Fortunately, AT&T generates tremendous cash flow that keeps total debt manageable, as evidenced by the reasonable leverage ratios the company is aiming for. In return, we expect steady growth for the company, as has been the case for many years. AT&T is a colossal business, but it’s not growing fast.
We believe this is key to AT&T’s profitability and growth going forward. Last year’s financial results show not only that AT & T’s focus on costs is working, but that the newer businesses are driving growth.
Competitive advantage and recession performance
AT&T has a competitive advantage with its solid position in various key industries. AT&T is also a recession-resistant company. As a telecommunications provider, AT&T enjoys steady demand as consumers are reluctant to forego broadband and cellular services even during recessions. We consider AT&T to be one of the most recession-resistant dividend aristocrats.
AT&T earnings per share during the Great Recession are shown below:
- 2007 earnings per share: $ 2.76
- 2008 earnings per share: $ 2.16
- 2009 earnings per share: $ 2.12
- 2010 earnings per share: $ 2.29
AT&T saw profits decline during the Great Recession, albeit at a modest rate. The company remained highly profitable during the recession, which helped it consistently grow its dividend. And AT&T eventually exceeded pre-recession earnings by 2016.
The company held up relatively well in 2020 as well. In a very challenging year for the US economy, AT&T remained profitable with strong cash flow due to the coronavirus pandemic.
Valuation and expected return
We continue to expect very strong returns for AT&T in the coming years due to a variety of factors. AT&T is currently one of the most attractive dividend aristocrats, especially for high-income investors.
We expect earnings per share to grow ~ 3% annually for the next five years. Modest sales growth will boost EPS, as will cost reductions to drive margin expansion. In addition, we expect sales growth from WarnerMedia and stronger performance from wireless services.
Additional shareholder returns result from the combination of the high dividend yield of the share and the change in the valuation multiple. The company’s annual dividend is now $ 2.08 per share, giving it a current yield of 6.7%. That makes AT&T a great income stock. Additionally, the payout ratio is less than 70% of forecast earnings for 2019, so we believe that AT & T’s dividend is adequately covered at this point.
Finally, we see the stock as slightly undervalued. We expect AT&T to achieve adjusted earnings per share of $ 3.20 in 2021. On this basis, stocks are currently trading at a price-earnings ratio (P / E) of 9.8. We view AT&T as undervalued with a fair value P / E estimate of 11.0. The valuation upgrade could increase the return by 2.3% per year. Including the dividend yield of 6.9% and the expected EPS growth of 3%, this translates into a total annual return of%.
This makes AT&T one of our top dividend aristocrats based on expected total returns for five years.
AT&T is a high quality company. The company is consistently profitable even in recessions. With the acquisition of Time Warner, the company also has an important growth catalyst.
Debt remains a concern for investors, especially given AT&T’s dividend streak. The company hasn’t announced a dividend hike since December 2019. Hence, it will have to announce an increase at some point in the next year to maintain its status as a Dividend Aristocrat.
However, we believe that the company’s immense free cash flow diminishes the importance of this concern. Selling non-core assets will also help deleverage. With expected earnings growth, high dividend yield and low valuation, we believe AT&T can offer attractive total returns to shareholders in the years to come. As a result, AT&T stock remains a buy for income and value-minded investors.
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