Updated on April 29th, 2021 by Bob Ciura
AT&T (T) is a widely-followed stock among income investors, and for good reason. The stock has a high dividend yield above 5%, and a long history of steady annual increases.
The company has increased its dividend payout for 36 consecutive years, making it a member of the prestigious Dividend Aristocrats, a group of S&P 500 stocks with at least 25 consecutive years of dividend increases.
Including AT&T, there are currently 65 Dividend Aristocrats. You can download an Excel spreadsheet of all 65 Dividend Aristocrats (with important metrics that matter) by clicking the link below:
AT&T is a strong business, with a leadership position across multiple areas of the telecommunications industry. It is also building on a major growth catalyst, the massive acquisition of Time Warner.
AT&T continues to rank highly among the hundreds of stocks in our coverage universe, and also among the Dividend Aristocrats. We believe that the stock remains a buy for 2021 and beyond.
AT&T traces its roots back to 1876 when Alexander Graham Bell invented the first version of the telephone. In its current form, AT&T is the result of a tangled web of mergers and spinoffs that have taken place since 1984, when the former AT&T spun off its local telephone operations but retained its long distance, R&D and manufacturing segments. SBC Communications was born from this and with it, the modern AT&T was as well.
SBC acquired several smaller telecommunications players, including what was left of AT&T in 2005, creating the company we know today. Since then, AT&T has diversified away from phone service with its DirecTV acquisition in 2015, and the 2018 acquisitions of AppNexus and Time Warner Inc.
Today, AT&T is one of the largest communications company in the world, operating in three business units: AT&T Communications (providing mobile, broadband and video to more than 100 million U.S. consumers and nearly 3 million businesses), WarnerMedia (including Turner, HBO, Warner Bros. and Xandr) and AT&T Latin America (offering pay–TV and wireless service to 10 countries). The company generated $172 billion in revenue in 2020.
AT&T’s market capitalization today is nearly $220 billion, making it a mega-cap stock.
The company has generated steady profits and strong cash flow for many years, and due mainly to the Time Warner acquisition, has a positive growth outlook ahead.
On April 22nd, 2021 AT&T reported first quarter 2021 results for the period ending March 31st, 2021. For the quarter the company generated $43.9 billion in revenue, up 2.7% from $42.8 billion in Q1 2020. Higher mobility and WarnerMedia revenue more than offset declines in domestic video, business wireline, and in Latin America.
Reported net income equaled $7.5 billion or $1.04 per share. On an adjusted basis, earnings–per–share equaled $0.86 compared to $0.84 in the year ago quarter.
Source: Investor Presentation
AT&T also updated its full year 2021 outlook, continuing to expect 1% revenue growth, adjusted earnings–per–share to be stable with 2020 and a dividend payout ratio in the high–50% range
AT&T continues to pay down the large amount of debt that was incurred from the Time Warner acquisition. The company ended 2020 with a net debt-to-EBITDA ratio of 3.1x. This ratio fell to 3.0x in the 2021 first quarter. AT&T maintains a target leverage ratio of 2.5x for 2024.
Aggressively paying down debt is especially important for AT&T, as the company took on a huge level of debt to finance its massive Time Warner acquisition, as well as other bolt-on deals in recent years.
Source: Investor Presentation
Fortunately, AT&T generates huge cash flow which will keep the overall debt load manageable, as evidenced by the reasonable leverage ratios the company has targeted. In turn, we also expect the company to report steady growth going forward, as it has done for many years. AT&T is a colossal business, but it is not a fast grower.
We think this is key for AT&T’s profitability and growth moving forward, and the financial results over the last year show not only that AT&T’s focus on costs is working, but also that its newer lines of business are driving growth.
Competitive Advantages & Recession Performance
AT&T has a competitive advantage with its entrenched position in various important industries. AT&T is also a recession-resistant business. As a telecom provider, AT&T enjoys steady demand, as consumers are extremely reluctant to give up their broadband and wireless service, even during recessions. We view AT&T as among the most recession-resistant Dividend Aristocrats.
AT&T’s earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share: $2.76
- 2008 earnings-per-share: $2.16
- 2009 earnings-per-share: $2.12
- 2010 earnings-per-share: $2.29
AT&T did see its earnings decline during the Great Recession, but at a modest rate. The company remained highly profitable during the recession, which allowed it to continue growing its dividend throughout. And, AT&T eventually eclipsed its pre-recession earnings level by 2016.
The company also held up relatively well in 2020. In a very challenging year for the U.S. economy, due to the coronavirus pandemic, AT&T remained profitable with strong cash flow.
Valuation & Expected Returns
We continue to expect very strong returns for AT&T in the coming years due to a variety of factors. AT&T is among the most attractive Dividend Aristocrats right now, particularly for income investors.
We expect ~3% annual earnings-per-share growth over the next five years. Modest revenue growth will boost EPS, as will cost reductions to drive margin expansion. In addition, we expect revenue growth from WarnerMedia, as well as stronger performance from wireless services.
Additional shareholder returns will accrue from the combination of the stock’s high dividend yield and the change in the valuation multiple. The company’s annual dividend is now $2.08 per share, putting the current yield at 6.7%. That makes AT&T a premier income stock. In addition, the payout ratio is less than 70% of projected earnings for 2019, so we believe AT&T’s dividend is sufficiently covered at this time.
Lastly, we view the stock as slightly undervalued. We expect AT&T to generate adjusted earnings-per-share of $3.20 in 2021. Based on this, shares are presently trading at a price-to-earnings ratio (P/E) of 9.8. We view AT&T as undervalued, with a fair value P/E estimate of 11.0. Valuation expansion could add 2.3% per year to returns. Including the 6.9% dividend yield and 3% expected EPS growth, this implies a 12.2% annual total return.
This makes AT&T one of our top-ranked Dividend Aristocrats, in terms of total expected five-year returns.
AT&T is a high-quality business. The company is steadily profitable, even during recessions. It also has a major growth catalyst in the form of its Time Warner acquisition.
Debt remains a concern for investors, particularly when it comes to AT&T’s dividend streak. The company has not declared a dividend increase since December 2019. Therefore, it will need to announce a raise at some point in the next year to maintain its Dividend Aristocrats status.
That said, the company’s immense free cash flow, in our view, diminishes the importance of this concern. Non-core asset sales will also aid in deleveraging. Due to expected earnings growth, the high dividend yield, and a low valuation, we believe AT&T can provide attractive total returns to shareholders in the coming years. As a result, AT&T stock remains a buy for income and value investors.