AT&T: The Safest 5% Yield?
09/18/2017 2:52 am EST
AT&T (T) is the largest domestic telecommunications company in the United States; the company can trace its roots back to 1876 when Alexander Graham Bell invented the telephone, explains Ben Reynolds, editor of Sure Dividend.
AT&T is highly shareholder friendly and has increased its dividend payments for 33 consecutive years. In the second quarter, revenues declined by 1.7%, but the company offset this sales decline by reducing operating expenses by 4.4%. Adjusted earnings-per-share of $0.79 delivered growth of 9.7% from the prior year’s figure of $0.72.
On a year-to-date basis, AT&T’s revenues have declined by 2.3% but higher margins have helped the telecommunications giant to achieve 7% adjusted earnings-per-share growth. AT&T also reaffirmed guidance for mid-single-digit adjusted earnings-per-share growth for the full-year of fiscal 2017.
All said, it was a ‘business-as-usual’ quarter for this high dividend stock as the markets patiently wait for more news on the Time Warner acquisition.
AT&T’s future growth will come from its pending $85 billion acquisition of Time Warner (TWX), which will diversify the company away from the highly competitive wireless industry and give it ownership of some of the most well-known media names in the business (including CNN, TNT, HBO, and Warner Bros).
The Time Warner acquisition is expected to deliver about $1 billion per year in cost synergies, and is expected to close by year-end after originally being announced in October of 2016.
AT&T is likely the single safest stock available today with a yield above 5%. The company had a payout ratio in the most recent quarter of 77.8% and 62.0% using GAAP and adjusted earnings, respectively.
AT&T’s long dividend history shows it is capable and willing to raise dividends through a variety of operating environments. Moreover, AT&T has a very stable business model. Its services are a necessity in today’s connected world, giving AT&T a utility-like business model with substantial barriers to entry.
AT&T continues to be the only Dividend Aristocrat with a dividend yield exceeding 5%. This gives AT&T a unique combination of income and safety.
Perhaps more importantly, it is currently firmly in ‘buy’ territory; AT&T is expected to report adjusted earnings-per-share of $2.90 in fiscal 2017, which means its stock is trading at a price-to-earnings ratio of just 12.9 at current prices.
For context, AT&T’s average p/e ratio over the past decade is 14.8. AT&T’s long-term average price-to-earnings ratio combined with 2017’s earnings estimates give the stock a fair value estimate of $43, implying 15% upside from current prices.