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Summary

  • The stock has been relatively flat since announcing the DirecTV deal in mid-May.
  • The dividend is a healthy 5.2%.
  • Paying more for next year's earnings estimates when compared to the trailing twelve month earnings is what makes me anxious.

The last time I wrote about AT&T Inc. (NYSE:T), I stated, "Due to the low earnings growth expectations, bearish technicals, and earnings contraction expectations I will not be pulling the trigger on this name right now." The stock has "popped" 0.97% versus the 4.73% gain the S&P 500 (NYSEARCA:SPY) posted during that time frame. It's safe to say that the decision was an okay one to make at the time. AT&T is a provider of telecommunications services in the U.S. and worldwide.

On 22nd April '14, the company reported first-quarter earnings of $0.71 per share, which beat the consensus of analysts' estimates by $0.01. In the past year, the company's stock is up 2.73% excluding dividends (is up 7.98% including dividends) and is losing to the S&P 500, which has gained 23.14% in the same time frame. Since initiating my position back on 20th August '13, I'm up 3.4%, inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if right now is a good time to purchase more of the stock for my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 10.32, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 12.83 is currently inexpensively priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. However, next year's estimated earnings are $2.76 per share while the trailing twelve month earnings per share were $3.43, I never like that. Next year's estimated earnings are $2.76 per share and I'd consider the stock inexpensive until about $41. The 1-year PEG ratio (2.44), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 4.23%. Below is a comparison table of the fundamentals metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

27Aug13

33.82

25.62

12.56

2.69

40

3.09

8.28

08Oct13

33.11

25.08

12.37

2.68

40

3.05

8.21

11Jan14

33.62

23.84

12.57

2.68

40

2.94

8.12

13Feb14

32.92

9.69

11.84

2.78

42

1.98

4.90

31Mar14

35.07

10.31

12.56

2.79

42

2.18

4.73

28Jun14

35.41

10.32

12.83

2.76

41

2.44

4.23

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 5.2% with a payout ratio of 54% of trailing 12-month earnings while sporting return on assets, equity and investment values of 6.6%, 20.6% and 12.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 5.2% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 30 years at a 5-year dividend growth rate of 2.4%. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

27Aug13

5.32

135

2.7

8.0

6.2

08Oct13

5.44

136

2.7

8.0

6.2

11Jan14

5.47

130

2.7

8.5

6.2

13Feb14

5.59

54

6.7

20.8

12.8

31Mar14

5.25

54

6.7

20.8

12.8

28Jun14

5.20

54

6.6

20.6

12.8

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 58.28. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars flattening in height, indicating the stock hasn't gone anywhere in a while. As for the stock price itself ($35.41), I'm looking at $36.16 to act as resistance and the 50-day simple moving average (currently $35.22) to act as support for a risk/reward ratio, which plays out to be -0.53% to 2.12%.

What Has Happened Since Last Time?

Quite a bit has happened since last writing about the company back in early April. The first thing that has happened was the company reporting first quarter earnings. The company reported earnings, which were 4% higher than a year ago on 4% more revenue while the share price was up 3.31% since the last earnings call. These were only okay results to me because of the quality of the earnings increase was through financial engineering and make me want to buy shares of the company only when the right opportunity comes along. The company saw a 10% increase in postpaid net adds during the quarter and saw wireless service revenue jump 2.2%. $1.2 billion was spent on share purchases and reiterated free cash flow guidance of $11 billion.

The other bit of big news which occurred during that time was the company has offered to acquire DirecTV (NASDAQ:DTV) in a cash and stock deal valuing DirecTV shy of $50 billion. Both boards were unanimous in approving the transaction and the deal should be accretive to AT&T on free cash flow per share ad adjusted earnings basis within a year of closing the deal. However, there is one huge caveat to the deal that I haven't heard being discussed much; AT&T can back away from the deal if DirecTV's NFL Sunday Ticket deal is not re-signed. Football season is coming up very shortly so the NFL deal needs to be consummated soon. Ma Bell announced that it wants to sell its 8.4% holding (roughly $6 billion) in America Movil (NYSE:AMX) ahead of the DirecTV deal and Carlos Slim seems to be the beneficiary of that sale as he intends to purchase the entire lot.

On the financial front of what has happened, the company announced that it is increasing revenue guidance for fiscal year 2014 from 4% to 5%. Along with increased revenue guidance, the company declared a $0.46 per share quarterly dividend with an ex-date of 08July14 and pay date of 01Aug14 for a forward yield of 5.23%.

Conclusion

I'm not too happy that at these levels I'm paying more for the stock on next year's earnings than I have been for the trailing twelve months and for this reason I'm seriously considering selling the stock during my next quarterly change out in August. The stock also hasn't done so well since the DirecTV deal was announced, so this is one more reason why I'm not happy with how the stock has been performing lately. On the bright side the 5.2% yield is pretty nice, although the stock is one of my more average sized positions.

Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates but expensive on growth potential while paying more for next year's earnings estimates when compared to the trailing twelve month earnings. Financially, the dividend is beautiful but the financial efficiency metrics have decreased slightly. On a technical basis, the stock appears to have a good reward/risk scenario. With the dividend ex-date looming shortly I'm going to buy a smaller batch than I normally do during the week, but I'm not too enthusiastic about it.

Because I swapped out Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) for AT&T in my dividend portfolio it is only fair that I provide an update from the swap-out date. From August 20, 2013, AT&T is up 4.79% while Cracker Barrel is up 1.53% and the S&P 500 is up 19.12%. My change out is performing decently against the trade itself, but not against the overall market.

(click to enlarge)

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: High-Yielding AT&T Is Making Me Anxious