Updated January 4th, 2019 by Bob Ciura
The Dividend Aristocrats are among the highest-quality dividend growth stocks. Investors looking for dividend growth would be wise to review the list, which is made up of 53 stocks in the S&P 500 Index, with at least 25+ consecutive years of dividend increases.
Every year, we analyze each of the Dividend Aristocrats in detail. This year’s edition begins with telecommunications giant AT&T (T), which has increased its dividend for 35 years in a row.
Not only that, but it also has the highest dividend yield of all the Dividend Aristocrats. AT&T is one of 390 dividend stocks with a 5%+ yield. You can see Sure Dividend’s full list of established 5%+ yielding stocks here.
This article will discuss why AT&T is one of the most attractive Dividend Aristocrats for income investors.
AT&T is one of the largest providers of cable and satellite TV, wireless, and broadband service in the U.S. The company has provided telecom services for over 140 years. Today, it covers 99% of the U.S., and generates over $170 billion in annual revenue. AT&T stock has a market capitalization of $215 billion.
AT&T has a diversified business model across multiple telecom services, including both consumer and business customers.
Source: Analyst Meeting, page 5
Telecoms are an attractive industry for investors, because the biggest operators like AT&T are highly profitable, with huge levels of cash flow. And since consumers are so reluctant to give up their television, Internet, and wireless service, AT&T is highly profitable and possesses the ability to raise prices.
AT&T generated $19.5 billion of free cash flow in the past four reported quarters. In turn, such huge free cash flow fuels the high dividend payments that make telecommunications stocks such attractive selections for income investors.
The telecom industry is rapidly changing, and AT&T is changing along with it. Major telecommunications companies are making a big push into media, to have the ability to own content and distribution. Major deals that have come to pass include Comcast (CMCSA) acquiring the remaining 49% of NBCUniversal it didn’t already own for $16.7 billion. Comcast also acquired Dreamworks for $3.8 billion, in 2016.
AT&T is following suit. Last year it acquired content giant Time Warner (TWX) in a massive $85 billion deal. The acquisition instantly made AT&T one of the major players in content. Time Warner has a number of valuable media properties including TNT, TBS, CNN, HBO, and Cinemax. It also owns the Warner Bros. movie studio.
Source: Time Warner Acquisition Presentation, page 6
By owning content and the technology on which it is delivered, AT&T can leverage its competitive advantages. It diversifies AT&T’s revenue mix, and accelerates growth. In addition, as a provider and a buyer of content, adding Time Warner is a hedge against rising costs for content.
The acquisition has already boosted AT&T’s growth. Total company revenue increased 15% for the period, while adjusted earnings-per-share increased 22% from the same quarter a year ago. The growth was fueled by the WarnerMedia segment, which grew revenue and operating income by 6.5% and 8.3%, respectively.
AT&T placed additional investments to maximize the monetization potential of its huge content library, specifically in advertising. AT&T recently acquired AppNexus for $1.6 billion and Otter Media, which will add to AT&T’s online video services.
The company’s dividend is well covered by both cash flows and earnings, which makes future dividend growth very likely.
Competitive Advantages & Recession Performance
One of the most important competitive advantages for AT&T is its network. It has invested billions to develop its network, which helps differentiate it from the competition. AT&T spent more than $140 billion on its network from 2002 to 2016, including spectrum acquisitions.
Because of these investments, AT&T is at the top of the U.S. telecom industry, along with Verizon, which is arguably the only other telecom that can compete on the same scale as AT&T. The concentration of the telecom industry helps drive AT&T’s high profitability.
This provides AT&T with a wide economic “moat”, a term popularized by legendary investor Warren Buffett. A wide economic moat indicates a company’s durable competitive advantages.
Such a strong competitive position allowed AT&T to remain profitable, even during the Great Recession. AT&T’s earnings-per-share during the Great Recession are as follows:
- 2007 earnings-per-share of $2.76
- 2008 earnings-per-share of $2.16 (22% decline)
- 2009 earnings-per-share of $2.12 (1.8% decline)
- 2010 earnings-per-share of $2.29 (8% increase)
AT&T’s earnings-per-share declined during the Great Recession, which should be expected. Discretionary expenses like cable TV are one of the things consumers might cut out of their budgets when the economy enters a recession.
That said, AT&T remained highly profitable during the recession, and returned to growth in 2010. This allowed it to continue raising its dividend each year.
Valuation & Expected Returns
Based on 2018 expected adjusted earnings-per-share of $3.50, AT&T stock trades for a price-to-earnings ratio of just 8.7. This is a fairly low price-to-earnings ratio, considering the S&P 500 Index currently sports an average price-to-earnings ratio above 19. As a result, AT&T stock appears to be significantly undervalued.
If AT&T’s price-to-earnings ratio reverts to the fair value estimate of 13.4, shares would return approximately 9.0% per year just from expansion of the valuation multiple.
In addition, total returns will be supplemented by earnings growth and dividends. AT&T can reasonably be expected to grow earnings by 6% per year over the next five years. Plus, the stock has a current dividend yield of 6.7%. As a result, total returns are expected to reach 21.7% per year over the next five years. This makes AT&T among the top Dividend Aristocrats for future expected returns.
AT&T has made a number of strategic decisions to position itself for future growth. In addition to its various acquisitions over the past year in media content and advertising, the company is investing heavily in 5G network technology. It seems apparent that AT&T has plenty of avenues for future growth in the years ahead.
In the meantime, AT&T stock has a very low valuation, along with a high dividend yield. AT&T’s dividend yield exceeds 6% and the dividend is highly secure thanks to the company’s strong profits and cash flow. This creates a favorable buying opportunity for value and income investors.