One of my favorite types of stocks to look for and own is one with low volatility and that issues a nice dividend. When I say "nice" dividend, I do not mean one so high that there is no possible way the company can sustain such a high payout for too long. The companies that I like to look for are the dividend aristocrats. These are the companies that have not only had a sustainable dividend over the last 25 years, but they have also increased each year. As a whole, they have a slightly higher payout, while also having slightly lower volatility than the S&P 500. In 2012, there were ten companies added to the list.
One of these companies is telecommunications giant AT&T (T). With a beta of 0.46, AT&T is about half as volatile as the market. The company's stock performance over the last 12 months shows that there was no significant swing in either direction as the company varied from the upper $20s to lower $30s per share. The company does have a very nice dividend yield of 5.7%, dishing out $1.76 to investors annually. The company also has a higher price to earnings ratio than the S&P 500 at 46.7, but it is right about the average of the industry at 40.2. Two of the biggest named competitors in AT&T's industry are Sprint (S) and Verizon (VZ).
Over the last year, Sprint's stock price has been hit hard. The company has lost roughly half of its share value, but where does it go from here? For awhile, Sprint was lagging behind because it was the only carrier between the big three to not have Apple's (AAPL) iPhone. Now that it does, it is still third and continues to lose money. One bit of news that is not good for the company is that Sprint was recently hit with a $300 million tax fraud lawsuit from the New York attorney general. The lawsuit indicates that in 2005, Sprint stopped collecting and paying New York sales tax on about 25% of revenue from monthly cell phone plans. The accusations indicate that Sprint's actions cost the state more than $30,000 per day, totaling $100 million. Sprint indicates that the allegations have no merit, but if found guilty, this would be disastrous for the company.
I would say that Verizon is AT&T's biggest competitor. The stock has basically moved in sync with the market over the last 12 months, not increasing much in price. However, that could change going forward. Verizon reported its first quarter earnings recently and beat analyst estimates on earnings per share. With estimates at $0.57, per share, Verizon came in slightly higher at $0.59. On the news of its earnings increase, the stock jumped 2.8%. Next quarter's estimate is at $0.63.
If Verizon continues its current progress, it is possible the company could beat estimates again. One area that may help Verizon reach this is the company's joining with General Dynamics to help the U.S. Army move to cloud computing. The move will help lower costs and consolidate data centers. The deal is said to last five years and be worth a potential value of $249.8 million. One issue that continues to affect the industry is reduced margins, as companies continue to subsidize for phones in high demand, such as the iPhone. Each time a subscriber signs a two-year contract, a carrier subsidizes about $400 of its purchase price. Why would companies be willing to lose this kind of money? Mainly, because the companies hope the customer will stay with the company longer. However, if a customer is able to get an upgrade every two years, the cycle will continue.
Ultimately, the smartphone users have higher monthly fees. These higher fees are the trade off for the carriers' subsidies. Ultimately, I think if any company is going to be hurt the most by this, it is going to be Apple. Verizon seems to be fed up with the subsidies and has openly admitted there should be an additional party involved, and was even quoted as being in support with Microsoft (MSFT). If customers are expected to pay the full price for a brand new iPhone, that will ultimately lead to less purchases of the phones, severely hitting Apple in the process.
AT&T is going to release its first quarter earnings soon, and analysts estimate the stock to have earnings of $0.57 per share. In addition to earnings, AT&T intends to initiate a share buyback plan for roughly 300 million shares. This would be a good move for the company, as it would increase the earnings per share of the stock, allowing dividends to continue to increase. In both the short and long term, I do not see a whole lot of fluctuation for the stock. There is not typically a lot of huge movement for AT&T. The low beta protects investors from the volatility of the market while the dividend helps boost investor earnings, helping their overall portfolio. Analyst estimates see the stock moving in the same direction with a mean target price of $31.71, which is not far from where it trades today. If an investor is looking for a high growth stock that will double and triple in price, this is not the one to choose. However, for a low volatile, dividend-yielding stock to help boost a portfolio's performance, AT&T would be a good addition.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.