Fear sometimes creates sensibility in investors. Concerns and fears about Europe are opening opportunities for certain companies in certain industries to "buck the trend" of herding with the bears. One of these companies is AT&T (T). The markets have just been ripe for a stock like this to continue to grow and prosper.
What is happening to make AT&T grow?
Global verse Home Investments
The well covered global economic slowdown has had a bearish impact upon the larger international companies in general. Often, investors will gravitate toward these companies for growth (thinking there is balance in multiple regions) and dividends. But since our slow down has been global, many of the stocks have not done well and have succumbed to the weakening economies in Europe primarily and in Asia to a lesser extent. General Electric (GE), a large well known conglomerate recently just broke out of a 10 week bearish trend with slowing sales in Europe that started in the last quarter of 2011. 3M (MMM) another international company is also in a 10 week (peak and valley) bearish trend because of global influence.
But this is not something that caught these large companies by surprise. Last December 3M forecasted slow economic growth for 2012. Last December CEO George Buckley warned of "weak economic growth next year." So it may not be a surprise but it has an adverse affect upon the international companies that investors look toward for stability and balance.
But the U.S. economy has been the one that has supplied a sense of stability. I am not going to say that it is recovering nicely, but it has done much better than other world regions and companies like AT&T are profiting nicely. Since the beginning of the year the stock has continued to grow nicely. It started off strong in the fourth quarter with a 50% increase in its (best ever) quarter and nearly doubles the previous year's sales. It has continued right into this year with first quarter revenue up 5.3% and earnings also beating expectations. To those of you who keep up with earnings and revenue regularly, this is not new. But the fact that they are generating revenue here in the states like they are makes a big difference.
It's Where the Dividends Are
Not only is the stock more stable in our home market, but the high dividends also attract investors since fixed income investments are at all time lows. In fact, the telecommunications sector is the highest dividend yielding sector in the S&P 500 index right now. Other companies in this sector are also doing good and generously sharing profits. Verizon (VZ) has been bullish through the bearish month of May with a dividend yield of 4.57%. CenturyLink (CTL), another competitor, has not been as bullish as AT&T and Verizon but has continued to hold its own-moving sideways through the global bearish trend and is also yielding a nice 7.5% dividend. AT&T is offering a dividend of 4.9%
There are more, but these are just two reasons that the market has found favorable circumstances for these stocks and AT&T in general. I am interested in taking advantage of market conditions by also creating a shot term income opportunity with AT&T. Option prices are good and we can create a short term play with minimal risk.
(click to enlarge)
The Options Play
The stock is presently trading at 35.44 and we are going to create a Bull Call Spread.
- Buy an October 2012 call with a strike price of '36' (priced at $0.72)
- Sell an October 2012 call with a strike price of '37' (priced at $0.37)
- Net Debit to Start: $0.35
- Maximum Profit: $0.65
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the Play
As long as fixed income investments remain low, high yield dividend stock like this will be a popular alternative. It will not change soon. This is the main reason investors will continue to pour money into these stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
