Dividend growth stocks — broadly defined as those that have raised their dividends each year for an extended period — are among the best stocks to buy for the long run.
This is why income investors should consider AT&T (T), a telecom giant that has raised its dividend each year for over 30 consecutive years.
AT&T is a member of the prestigious Dividend Aristocrats list. It also has a high dividend yield of 7.5%, as the share price has sunk 30% so far in 2020. But AT&T’s high yield combined with a long track record of dividend growth makes it a favorite holding for individual investors, and also high-profile institutional investors such as Elliot Management.
AT&T stock also appears undervalued today, having deeply underperformed the S&P 500 year-to-date. Overall, AT&T is an attractive stock for value and income investors.
AT&T is a large telecommunications company providing a wide range of services, including wireless, broadband, and television through its cable operations and its DIRECTV satellite business. Its core telecom services include mobile, broadband and video service to 100 million U.S. consumers and 3 million businesses. It also operates WarnerMedia as a result of its huge acquisition of Time Warner. The deal brought multiple valuable properties to AT&T such as the Turner networks, as well as CNN and HBO, as well as the Warner Bros. production company.
In the 2020 third quarter, AT&T generated revenue of $42.3 billion, along with operating cash flow of $12.1 billion. Among the highlights, AT&T recorded more than 5 million total domestic wireless net adds along with over 1 million postpaid net additions. The company’s postpaid churn was an impressive 0.69% for the quarter. AT&T still expects free cash flow of at least $26 billion for the full year. Therefore, the company will continue to generate plenty of free cash flow to accomplish all of its capital allocation priorities — investing for growth, paying down debt, and paying dividends to shareholders.
Importantly, AT&T’s dividend has held up over the years, even during recessions. According to ValueLine data, AT&T generated earnings-per-share of $2.16 in 2008, $2.12 in 2009, and $2.29 in 2010. As a result, the company managed to grow its EPS by 6% from 2008 to 2010, a highly impressive performance in a deep economic downturn that eventually became known as the Great Recession.
AT&T has increased its dividend for 36 consecutive years, a period of time that included multiple recessions. And yet, the company has kept on increasing its dividend each year, thanks to its high-quality assets and diversified business model. Consumers are highly reluctant to give up their wireless, broadband, cable, and other telecom services, even when times are tight. This simple reality helps explain AT&T’s resistance to recessions over the past several decades.
The S&P 500 Index has recovered all of its losses from March and April, and is now up approximately 5% year-to-date. But not all stocks have enjoyed a similar recovery. For example, AT&T stock is down 30% this year.
However, we believe AT&T is an undervalued stock, with long-term growth catalysts in wireless, broadband, and now content after the Time Warner acquisition.
In the meantime, the stock has a high yield of 7.5% and a long history of steady dividend increases each year. Overall, AT&T appears to be a strong pick for income and value investors.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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