Aristocrats And High-Yields Are An Attractive Combination
Dividend Aristocrats is a label that brings royalty to mind and rightly so. This short-list of dividend-paying stocks is a who’s who of the oldest, longest-running cash-flow machines on the market.
To become an Aristocrat means paying a dividend and sustaining at least 20 years of distribution increases. Not just that, it means to continue sustaining dividend increases into the future. Once the increases cease, stocks that were once Aristocrats become regular old dividend-paying stocks.
Sustaining a dividend increase for 20+ years is no small feat. In today’s times, that means surviving the Dot Com Bubble, the Housing Bubble, the Global Financial Crisis, the Trade War, and now the Coronavirus. To do that means steady management, management with a long-term vision, and that’s what we have at AT&T (T).
A High-Yield With Growth In The Forecast
High-yield is not typically a phrase I associate with Dividend Aristocrats for several reasons. For one, the payment is usually safe so attracts lots of investors. The increases are also easy to forecast so share prices tend to front-run them when they happen. Also, small payments are fundamental to long-term, incremental increases so big yields aren’t always the goal.
AT&T’s yield was attractive before the epidemic struck because it was relatively high from several perspectives. Now that the market has entered bear-market territory the stock is paying an eye-popping 7.25%.
The distribution growth rate isn’t spectacular at only 2.5% but that’s OK. A low distribution growth rate is also fundamental to future dividend increases, particularly if there is also EPS growth in the forecast.
The full-year 2020 business forecast is a little iffy because of the coronavirus outbreak but, even so, the analysts are expecting growth. Revenue and EPS should grow slightly in 2020, about 0.5% and 0.6% respectively, with some acceleration in the future. In 2021, AT&T is expected to see revenue growth continue but slow while EPS growth accelerates to 4.5%.
A Virus-Proof Moat
AT&T recently got a downgrade by Wedbush analysts who see Verizon (VZ) as having an incremental advantage over the AT&T business model. According to them, AT&T’s more-diverse portfolio is a disadvantage over pure-play operators. Where Verizon is strictly a telecom/mobile operator AT&T has its fingers in telecom, mobile, internet, wi-fi, satellite, and T.V. All businesses expected to see high demand during the viral-induced stay at home period.
- AT&T is well-positioned for the 5G revolution. The 5G rollout planned for the summer may be slowed but it is still coming.
Verizon reported some week-to-week figures on Friday that point to increased business for both companies. Because of the stay-at-home shift streaming demand increased 12%, web traffic climbed 20%, virtual private network, or VPN, jumped 30% and gaming skyrocketed 75% while Social media usage remained constant.
For us, the real difference lies in the dividend and the value. Both stocks are trading at deep discounts and pay high-yields but AT&T is the bigger value and better yield. Trading at 7.9X its forward earnings AT&T is significantly cheaper and much better yielding than Verizon’s 10.5X earnings and 4.75% yield.
A 40% Upside Is Icing On The Cake
The reason why AT&T is trading at such a low valuation and high yield is the pandemic-inspired market correction. The sell-off, which is contrary to AT&T’s earnings and dividend-paying potential, has left the stock deeply undervalued in the eyes of the analysts and offering up a double-digit opportunity for investors. And that isn’t counting the dividend payment.
The average analyst rating is a Hold leading to Buy. Of the 30-odd analysts covering the stock, only 1 is bearish. More than half are neutral/hold but a third of them rate a strong-but. Regardless, the consensus target is just shy of $40 which implies a 40% upside from today’s prices. Today’s action has prices bouncing at a support target and potential bottom.
Investors looking to put money to work in this stock should start with small purchases. Price action may move below support at the $26.75 level and that could send the market much lower. Once support confirms, if it will at this level, follow-on purchases can be added as the market moves higher.