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Summary

  • T holds up despite poor earnings and rocky market.
  • Dividend is main attraction of AT&T, as it operates in a competitive, capital intensive environment.
  • True Believers of this Dividend Aristocrat can "Put" an extra 7% annually in their pockets.

I wrote an article about AT&T (NYSE:T) in June ("A Junk Bond in Equity Clothing"), where I discussed the dividend, the Company and its prospects. My general thesis was that T operates in a competitive, capital intensive environment and the principal attraction for investors was the dividend. And while the dividend was not at risk, the underlying value of the security could decline in a rising rate or inflationary environment.

Lots of News; Stock Flat

Since that time, three noteworthy events occurred. On July 23, T reported disappointing earnings, missing the consensus estimate by $0.01 and falling short of Q2 2013 by $0.03; the stock fell a tad more than 1%. At the time, I noted the high level of CapEx needed to support stagnant earnings. On July 29, Windstream (NASDAQ:WIN), an "old fashioned" wireline telecom provider focusing on the rural market, announced plans to spin-off certain assets into a REIT. T jumped almost 3%, as the market reacted to prospect of the Company creating a high-yielding, highly secure separate entity. The third event is the slow-motion market "correction," which has taken place since July 31, driving T down almost 5%.

Despite the three items noted above, T is trading within 1% of the price on June 26 (the date my original T article was published). In short, recent events are a living demonstration of T's Beta of 0.29.

(click to enlarge)

Source: Yahoo! (June 26- $34.81 adj. for $0.46 dividend; Aug. 6- $34.62)

What Investor's Want

What struck me following the publication of the June article was how many investors viewed T as a core position that they would hold, basically come "hell or high water." The term "Dividend Aristocrat" was used with reverence. Two of the more interesting comments to the article were, "I'll keep this in mind while I'm spending the $6,500 at&t sends me every quarter" and "I am long T for many years and see no reason to sell even if price drops 20%."

Too Rich for Total Return Investors . . . Rich Dividends for Income Investors

In revisiting T, I hold the same opinion, that operating in a competitive, capital intensive environment, with a forward PE of 12.7 and a PEG (PE/Growth) of 2.55, the Company offers too much risk relative to reward for a total return investor. However, the generous 5.2% dividend can be considered safe and is highly prized by income/dividend investors.

If 5.2% is Good, 12.0% is Better

The dividend appears to be the attribute of T most valued among many (most?) investors. If we accept this statement as fact, there appears to be a way for T "true believers" to more than double their income (technically dividend income and short term capital gains) from $1.84/share (current annual dividend) to an annualized $4.14/share or a whopping 12.0%.

The alchemy involved is selling T June 2015 Put Options would put an extra $2.30 (last trade) in an investor's pocket. I say this is a strategy for "true believers," because if T is trading below $33.00 on June 19, 2015, a seller of the Put Options I described would have to buy T at $33.00. To say it another way, if you really believe in T, you can dramatically increase your annual income and worst case you own more of the company you believe in at a "bargain," relative to today's price (T would have to fall 5% for this to come into play).

Summary

Too rich and risky for total return investors, T is a stock best held by those who truly value its income. Recent events have highlighted operating challenges and opportunities from financial engineering. Committed income investors may want to consider Put Options as a way to earn double digit income (dividends and capital gains) from staid and conservative T.

Please note that option income is not dividend income and is taxed as a capital gain (consult your tax advisor). And as always, do your own due diligence, make your own investment decisions and be sure you really understand all aspects of options investing prior to any activity (if you have never used options, or want a refresher course, please ask your broker for the option brochure).

Source: AT&T: 12% Income For True Believers