AT&T (T) is the second largest telecommunications business in the U.S. based on its $205 billion market cap; only rival Verizon (VZ) is larger, with a $244 billion market cap, explains Ben Reynolds, editor of Sure Dividend.

AT&T has the higher sales of the two, with $172.9 billion in sales over the last 12 months versus $128.4 billion for Verizon. Scale is a critical competitive advantage in the telecommunications industry.

The U.S. telecom industry is comprised primarily of three large companies: AT&T, Verizon, and T-Mobile (TMUS). The cost of building a network large enough to compete with these industry giants is enormous. This gives AT&T (and its two large competitors) a durable competitive advantage.

The company’s durable competitive advantage — and shareholder friendliness — is on display with its long dividend history. AT&T has increased its dividend payments for 36 consecutive years.

While AT&T has a durable competitive advantage and has proven it prioritizes rewarding shareholders with rising dividends, the company is not growing quickly. Adjusted earnings-per-share have compounded at 5.1% annually from fiscal 2010 through fiscal 2019.

This level of growth is ahead of inflation and gives the company room to continue increasing dividends, but growth is not the main reason to own AT&T stock. The company’s high dividend yield of 7.2% will likely return more than underlying business growth for shareholders.

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It’s rare to find a quality security with such a high yield in today’s generally overvalued market. And, the company’s high yield is well covered. AT&T is paying out just 64% of expected fiscal 2020 adjusted earnings-per-share of $3.25.

We believe AT&T to be undervalued. The company’s stock is currently trading for a price-to-earnings ratio of only 8.8 times our 2020 adjusted earnings-per-share estimate. For comparison, the company’s price-to-earnings ratio over the last decade is 12.6.

With a high yield and an undervalued stock, AT&T makes a promising investment. The company is likely to continue paying its big dividend even during a recession, so investors are likely to be ‘paid to wait’ for the company’s valuation multiple to rise to historical averages.

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