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This 'Dividend Aristocrat' Is Undervalued and Pays 6.5 Percent

at&t logo on the modern building facade
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Monday, 05 November 2018 04:31 PM Current | Bio | Archive

Buying high-quality dividend growth stocks is a time-tested way to build wealth over time.

Buying these great businesses when they are undervalued is even better. Investors have a tendency to panic when stocks go down, but they should actually get excited. Declining stock prices mean the best businesses are going on sale, which gives investors an opportunity to buy the best dividend stocks at a discount.

AT&T Inc. (T) is a Dividend Aristocrat, a group of 53 stocks in the S&P 500 Index that have raised dividends for over 25 years in a row. Shares of AT&T have declined over 20% year-to-date. As a result, the stock is significantly undervalued, and offers a dividend yield of 6.5%. This gives investors a tremendous buying opportunity.

A Lumbering Giant No More

Telecom stocks like AT&T are often viewed as stodgy, slow-moving behemoths with little to no growth potential. In some cases, this is true. AT&T is indeed a huge telecommunications company, with over 100 million customers in the U.S., and a significant presence in Latin America. But AT&T is moving aggressively to find new areas of growth, primarily through acquisitions.

For example, AT&T made a huge splash in content with the $81 billion acquisition of Time Warner, Inc., owner of multiple media brands including TNT, TBS, CNN, and HBO. Time Warner also has a movie studio, and sports rights across the NFL, NBA, MLB, and NCAA.

Time Warner has already delivered a significant boost to AT&T’s growth, evident by the company’s recent third-quarter earnings report. Revenue increased 15% due largely to Time Warner. AT&T’s adjusted earnings-per-share rose 22% for the quarter, as Time Warner and AT&T’s legacy businesses reported growth. AT&T is delivering cost synergies from the Time Warner deal as well. Last quarter, AT&T’s adjusted operating margins rose by over 300 basis points, a huge level of margin expansion over last year’s comparable quarter. Free cash flow was also up 16% to $6.5 billion.

But AT&T didn’t stop with the Time Warner acquisition. Now that it has a massive content platform, it is moving quickly to maximize the advertising potential from all its content. AT&T recently announced it will acquire AppNexus for approximately $1.6 billion. It will also acquire Otter Media, which has a large online subscription video service provider. These deals will help AT&T expand its advertising platform.

Dividends On Speed Dial

Perhaps the most attractive aspect of AT&T stock is its dividend. The company currently pays an annual dividend of $2.00 per share. The dividend payout results in a current yield of 6.5%, a very high yield that is more than three times the average yield of the S&P 500 Index. Even better, AT&T’s dividends are likely to grow over time. The company has raised its dividend for over 30 years in a row. This means AT&T has a high yield today, and the dividend has a growth component as well.

Not only does AT&T offer a high dividend yield, but the stock could also reward buyers with strong share price gains. That is because the stock appears to be significantly undervalued, relative to its intrinsic value. The stock currently trades for a price-to-earnings ratio of 8.7, compared with a fair value estimate of 13.4, its long-term average valuation. If the stock valuation rises to the fair value estimate, it would boost annual returns by 9% per year. This demonstrates the potential rewards of buying high-quality stocks when they are undervalued.

Lastly, AT&T’s earnings growth will add to its shareholder returns. The company is expected to grow earnings-per-share by 6% per year over the next five years. The combination of valuation expansion, dividends, and earnings growth is expected to result in returns of 21%-22% per year over the next five years.

Disclosure: I am long T.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Buying high-quality dividend growth stocks is a time-tested way to build wealth over time. Buying these great businesses when they are undervalued is even better.
at&t, t, dividend, aristocrat
653
2018-31-05
Monday, 05 November 2018 04:31 PM
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