AT&T: $31.33 Is Magical And It's Near

| About: AT&T Inc. (T)
This article is now exclusive for PRO subscribers.

After closing 2013 at $35.16, AT&T (NYSE:T) now finds itself trading at $31.86. That's a 10% price drop in two months and the stock is already tempting for income investors with a yield of 5.80%. However, if the stock price falls a further 1.6 %to around $31.33, it will reach an interesting buying point for the reasons covered below. With macro economic factors like the Ukraine crisis looming large, it is not unfathomable for AT&T to fall to that level. Let us get into the details.

6% Yield Point:

  • AT&T pays $1.84 per share annual as of now and that represents a yield of almost 5.80%. But where is the 6% yield?
  • If you are willing to just wait until the end of the year, we will likely get another dividend increase from AT&T. AT&T has a 30-year streak of consecutive dividend increases. Increase number 31 will put the yield on cost at 6% for investors who buy at $31.33 and below. While castles in the air have often destroyed investors, it is worth buying a dividend aristocrat anticipating a dividend increase that is just about two quarters away.
  • The dividend growth rate has slowed down but even if AT&T sticks to the recent cent/quarter dividend increase, the annual dividend of $1.88 will give a yield of 6% at $31.33.

52 Week Low: $31.33 (for that matter anything below $31.74) should be a new 52-week low for AT&T. As mentioned in quite a few articles, a 52-week high or low by itself does not make a stock a buy or sell. But when you see cash cows trading at the lower end of their ranges, it is prudent to at least average in if not go all in.

A new low of $31.33 would also represent a 20% drop from the 52 week high of $39. That is substantial by any means, whether you consider that as a correction or a bear market by itself.

(Source: Yahoo Finance)

Technical Support: There are some magical yield spots for well-known stocks. The "magic" basically refers to more investors willing to buy at that yield level. For example, Coca-Cola's (NYSE:KO) 3% yield level has been covered extensively here on Seeking Alpha. The same way for AT&T, 6% seems to be that magical point. The chart below shows multiple instances where the stock was quickly bid up each time the 6% yield point was hit, at least over the past 3.5 years.

The last time AT&T consistently (meaning at least for a few consecutive months) traded at a 6% yield point was in mid-2010. As a reminder, the highest that AT&T yielded even during the 2009 crisis was about 7.50%.

(Source: YCharts.Com)

Please note that the 6% yield point right now is $30.66. The same 6% yield point in 2013 (before the dividend announcement) was $30. The 6% yield point in 2012 (before that year's dividend announcement) was $29.33. The 6% yield in 2011 was $28.6 and so on.

Forward-Looking Analysis:

  • AT&T's interest in Vodafone Group (NASDAQ:VOD) has been blowing hot and cold recently. Rumor has it that AT&T is still aggressively pursuing Vodafone. Needless to say, the $100 billion company will make a huge difference to AT&T's fortunes in international markets. As a reminder, Vodafone is the world's second largest provider behind only China Mobile Ltd (NYSE:CHL).
  • While T-Mobile US (NASDAQ:TMUS) and its aggressive CEO have been in the news recently for taking it to the "big boys," AT&T is not behind in flexing its stronger muscles. The company has announced a number of strategic price cuts in its plans this year to attract more customers. While customers eventually win in case of a price war, it is very clear that this space is now about volume and not margin. Also in price wars, the "big boys" usually win out due to deeper pockets. And there is no question as to who is the big boy here.
  • While the company is actively trying to find its next growth driver, investors enjoy an almost 6% yield that is as safe as it comes. The company's free cash flow strength is more than sufficient to cover current dividends and also give investors hope for future increases, as tiny as they might be.
  • Conclusion: So, what are your thoughts on this dividend aristocrat? Are you a buyer when the stock hits a 6% yield?

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.