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Why AT&T Is the Perfect Income Stock Today

Why AT&T Is the Perfect Income Stock Today
Luckydoor | Dreamstime.com

Monday, 09 July 2018 07:17 PM Current | Bio | Archive

Investors looking to generate income usually have to choose between two groups of stocks. First, there are dividend growth stocks, which raise their dividends at a high rate each year. The downside is that many dividend growth stocks have low dividend yields.

On the other hand, there are dividend stocks with high yields above 5 percent. These high-yield stocks are attractive for income, but in many cases their high yields are the result of questionable fundamentals and a declining share price.

AT&T (T) is a rare example of a stock that combines both qualities. AT&T not only has a high dividend yield of 6.2 percent, but it also has raised its dividend each year for the past 34 years, making it a member of the S&P Dividend Aristocrats.

Because it provides investors the best of both worlds — a high yield and dividend growth — AT&T is the perfect income stock today.

Business Overview and Growth Opportunities

AT&T is one of the largest telecommunications companies in the world, with a market capitalization of approximately $235 billion. It offers a wide range of services, including wireless phone, cable TV, and satellite TV through its subsidiary DirecTV.

AT&T has a reputation as a slow-growth telecom giant, but growth is about to pick up in a big way. On June 15, AT&T completed its $81 billion acquisition of media giant Time Warner Inc. This was a major win for AT&T, after the Department of Justice sued last year to block the deal on antitrust grounds. AT&T and Time Warner put together will have more than 140 million mobile subscribers, and 45 million video subscribers. AT&T is now a content behemoth, as Time Warner controls a number of huge media properties, including TBS, TNT, HBO, and the Warner Bros. movie studio.

Separately, AT&T announced it will acquire AppNexus, for approximately $1.6 billion according to The Wall Street Journal. This deal will help AT&T enhance its advertising and analytics platform. With such a huge content library, it makes perfect sense for AT&T to expand on its advertising potential. These two deals should accelerate AT&T’s earnings growth in the years ahead.

Valuation and Income Potential Are Highly Attractive

AT&T is an attractive stock for value and income investors. Average consensus among the 20 analysts currently covering AT&T, is for the company to generate earnings of $3.42 per share in 2018. Based on this forecast, AT&T stock trades for a price-to-earnings ratio of just 9.4, which is well below its average price-to-earnings ratio of 13.4. If AT&T stock were to return to its 10-year average valuation — which is not unreasonable given the S&P 500 Index trades for 25 times earnings — the stock would return over 7 percent per year, just from valuation expansion.

In addition, earnings growth and dividends will also add to shareholder returns. A fairly conservative forecast for AT&T would be to grow earnings by 5 percent per year, which should be easily achievable with multiple growth catalysts intact. Adding in valuation expansion and the 6.2 percent dividend yield, and AT&T’s total shareholder returns could exceed 18 percent per year over the next five years. With a high dividend yield, high expected total returns, and dividend growth each year, AT&T is the perfect income stock today.

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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AT&T has a reputation as a slow-growth telecom giant, but growth is about to pick up in a big way.
att, stocks, ben reynolds
Monday, 09 July 2018 07:17 PM
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