Dividend Aristocrats are those companies that have been able to increase their dividends for at least 25 consecutive years.
Attaining this status is not something that is easily accomplished. First, a company must be a member of the S&P 500, which means they must be one of the largest companies in the U.S. Second, a company must offer a product or service that consumers cannot do without. This allows the company to grow for long periods of time. Lastly, and perhaps most importantly to income investors, a company must have the ability to weather all phases of the economic cycle if they hope to be able to increase its dividend payment for at least a quarter of a century.
The Dividend Aristocrats are such an exclusive group that there are currently only 57 companies that have earned this title.
One well known Dividend Aristocrat that we think is an excellent purchase right now is AT&T (T). AT&T stock is a buy today especially for dividend investors.
Over the last year, AT&T’s stock has underperformed the S&P 500, returning only 2.7% compared to the index’s 7.3% gain. Year-to-date, AT&T has seen its share price increase 13.7%. This is a solid return less than six months into the year, but still below the S&P 500’s 17.7% climb.
We think that this underperformance against the market gives the stock the potential to see impressive growth going forward.
Company Background and Financial Results
AT&T has been in existence in some form or another for more than 140 years. Companies don’t last that long if they don’t offer quality products or services. Today, AT&T offers mobile, broadband and other communications services to consumers and businesses in the U.S. After purchasing WarnerMedia in 2018, the company also offers Turner, HBO and Warner Bros. content. AT&T also provides advertising services in Latin America.
AT&T that we know today is a complex mix of merges and spinoffs that have been taking place since the early 1980s. The company trades with a market capitalization of just under $237 billion and produced approximately $170 billion in sales in 2018.
AT&T released financial results for the first quarter of fiscal 2019 on 4/24/2019. The company’s top line grew 17.9% to $44.8 billion. This was primarily due to the Time Warner acquisition. Despite the double digit growth, sales missed estimates by $280 million. Earnings-per-share totaled $0.86, which was $0.01 below estimates and a 1.2% increase from the first quarter of fiscal 2018.
The Mobility segment, which is the largest in the company, grew revenues 1.2% to $17.6 billion. Service revenue improved 2.9%, but was offset by a 4.5% decline in equipment.
AT&T had 80K net postpaid phone adds, which was the first positive total for the first quarter in five years. 179K smart phone net adds was offset by 482K tablet and other computing device net losses. Postpaid phone churn increased to 0.93% from 0.84% from the first quarter of last year.
Sales for the Entertainment Group declined to 0.9% to $11.3 billion as the company lost a net 627K subscribers. DIRECTV NOW lost 83K subscribers due to price increases and less emphasis on promotions. AT&T did see 93K broadband net adds during the quarter.
Business Wireline experienced a sales decline of 3.7% to $6.5 billion, as growth in strategic and managed services only partially offset declines in legacy products. Wireline capabilities grew 5.5% year-over-year.
WarnerMedia grew sales 3.3% to $8.4 billion on the strength of Warner Bros., which was up 8.6% due to double digit gains in theatrical product revenues. Revenues for Warner Bros. television was higher by nearly 8% as well. On the other hand, Turner sales dropped 0.4% due to a decrease in advertising. Advertising results were negatively impacted by the shift of NCAA Final Four games into the second quarter.
AT&T expects to earn $3.60 per share in 2019, which would be an increase of 2.3% from the previous year. We expect that the company can grow earnings-per-share at a rate of 3.1% per year through 2024. This is slightly above the company’s 10-year growth rate, but growth from WarnerMedia should help propel higher growth for AT&T.
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While first quarter results were mixed, income investors likely weren’t too concerned as the AT&T is primarily known for its dividend. The company has raised its dividend for the past 35 years. Currently sitting at 6.3%, the company’s yield is more than three times the average yield of the S&P 500. This makes the stock very attractive for investors searching for income. The current yield is also above the stock’s 10-year average yield of 5.6%
A high yield can often be a sign that the company has a deteriorating business, making the dividend prime for a cut.
This is likely not the case with AT&T as its dividend is well supported by cash flow.
Over the last four quarters, AT&T has generated more than $25 billion in free cash flow. The company has paid out $14.1 billion in dividends during this time period, which represents just 55% of free cash flow produced during this period of time.
This has enabled AT&T to sustain its dividend, but also help pay down debt. For example, between free cash flow and asset sales, the company expects to pay down nearly 75% of the $40 billion it had to issue to acquire Time Warner Inc by the end of the year.
In addition, AT&T has been through three separate recessions and has managed to increase its dividend each time. Because of this, we find that the 6%+ yield is very safe even in the event of a prolonged downturn in the company’s business.
In addition to earnings growth and dividend yield, Sure Dividend believes that changes in an investment’s valuation can also have an impact on total returns.
AT&T closed the 6/21/2019 trading session at ~$32.50. Based off of expected earnings-per-share of $3.60 for 2019, the stock has a price-to-earnings, or P/E, ratio of 9. This compares quite favorably to our five-year target P/E ratio of 12. If shares were to reach our target by 2024, then valuation would add 5.9% to total returns during this period of time.
If this comes to fruition, then total annual returns would be made up of the following:
• 3.1% earnings growth.
• 6.3% dividend yield.
• 5.9% multiple expansion.
When you factor in earnings growth, dividends and possible changes in valuation, investors could be looking at 15.3% total returns for shares of A&T over the next five years.
AT&T’s stock has performed well in 2019, though it trails the return of the market index. The company’s most recent quarter showed signs of both strength and weakness. Gains in Wireless Service and TimeWarner were offset by the Entertainment Group, Business Wireline and Latin America.
Still, the stock offers a 6%+ dividend yield that we feel is very safe. In total, investors looking beyond the short term could be rewarded with at least 15% returns through 2024. As such, shares of AT&T receive a strong buy recommendation from Sure Dividend.