AT&T (NYSE:T) reported Q1 earnings last evening, and you can find all the details here on Seeking Alpha. To provide a short summary, revenues were in line and EPS beat by a cent. But the stock is off close to 5%, a massive sell-off for a safe stock like this.
This article presents a few reasons why this sell-off is actually good news for long-term investors. Let us get into the details.
- The stock went from about $32 in February to $36 before the earnings report. This was mainly due to investors running for cover as high-flying stocks were selling off. Not surprisingly, the stock went way past the overbought territory, with a Relative Strength Index of 96, as shown below, but this has started cooling down a bit now. The sell-off could push the RSI to a reasonable territory.
(Source: Yahoo Finance)
- It puts AT&T's current yield very close to the 5-year average yield of 5.60%. Investors must remember that this is a range-bound stock because of its dividend support. Over the past 5 years, the yield level has been narrow, between 4.6% and 7%. Yes, that is narrow for a 5-year period. So the trick with stocks like AT&T is to start picking up the shares near and above the average yield.
- Moving onto the business fundamentals, the wireless division was exceptionally strong in Q1, as Wells Fargo analysts have quickly realized here. More than 1 million post-paid customers were added, which was way above the estimates.
- The company also reiterated its yearly free cash flow guidance of $11 billion. More than earnings, it is free cash flow that investors must watch with companies like AT&T that have heavy capital expenses. As covered in this article, even AT&T's lowest quarterly free cash flow more than handily covers the dividend commitment to shareholders. That should hold true for 2014 as well, as the company is guiding an average quarterly FCF of $2.5 billion per quarter, while the company requires $2.39 billion for dividends (5.2 billion total shares times 46 cents/qtr).
- Wells Fargo (check the link above) has a price target of $42 to $44 for AT&T, which presents a massive 25% upside from here. Adding the 5.3% yield is like cream on cake.
- There have been a few insiders buying at the $34 to $35 level in the last two years, as can be seen here. Maybe even insiders like this range.
- To appreciate the difference between buying these range-bound stocks at their highs versus lows for long-term investors, please take a look at the tables below. They both use an annual dividend growth rate of 2% that AT&T has become accustomed to.
- The one on the left shows the yield on cost for investors buying at a 52-week low of $31 and the one on right is for investors buying at a 52-week high of $39. Obviously, this is hindsight bias looking at the trading range now, but the point is stocks like AT&T and Intel (NASDAQ:INTC) usually flash the buy signs near their average yield level. AT&T is now at the mid-point of its 52-week range and this might be a good time to initiate or add to existing positions. This is one stock where average down is unlikely to hurt in the long term.
(Source: 52-week high and low, dividend data from Yahoo Finance)
Conclusion: The market has now recorded 6 more consecutive days of gain, and there is bound to be a sell-off, if not a crash. The number of people calling for a crash has slowly but surely been going up. If there is even a slight jitter, AT&T's low beta and high yield will be something that more investors will seek. Get in before the crowd.
Disclosure: I am long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.