AT&T (NYSE:T) is a dividend champion that has paid a growing dividend for 30 consecutive years. It came up in my stock screening at the beginning of October because it met my basic criteria, which I outlined in a previous article about Coca-Cola (KO). I am tempted to buy AT&T at these prices because of its 5%+ yield on cost, but can't help think about the future growth prospects of that dividend.
3rd Quarter Results
AT&T reported earnings on October 22. Analyst's estimates were for an EPS of $0.64 on $33.3 billion of revenue. The company missed expectations with earnings of $0.63 per share on revenues of $33 billion. Consolidated revenue grew 2.5% compared to a year ago.
The market reacted negatively after AT&T missed estimates. Share prices took a hit. Technically, it found support around the $33 price level and has moved up over 5% since. I could wait and see if AT&T retests those lows and make my purchase at cheaper prices. I would increase my yield just a bit and provide a cushion by buying near support. Alternatively, I could just buy now and be done with it, considering how cheap it is with the low P/E (NYSE:TTM) around 10%, according to Yahoo Finance.
The Dividend Growth Dilemma
My basic investing strategy is centered on dividend growth. Previous purchases in Coca-Cola (NYSE:KO) and McDonald's (NYSE:MCD), in my dividend growth portfolio, sport high single digit and double digit 10 yr. growth rates. Sure, these are historical rates and they are no guarantee of the future, but they provide a glimpse of how well these companies managed to grow their dividends over the previous decade. AT&T currently has a 4.9%, 10yr dividend growth rate. That's barely keeping up with inflation. The question is am I willing to allocate funds to invest in a company that lacks future growth prospects, despite an appealing high yield.
After some consideration, however, I decided that a different strategy may be warranted. The logic is based on the fact that we are in a low interest rate environment where bank savings accounts and certificates of deposit (CD's) are paying around 1% at best. In this scenario, AT&T's current dividend yield may play an important role. I remember the good old days when CD rates of 5%+ were being advertised everywhere. Online savings accounts were being offered with a 3%+ rate. Those days are gone for now. However, with a 5%+ yield on cost, I can use AT&T as a CD-replacement. It's true that a CD is guaranteed by the FDIC, and AT&T's dividend is not. To counter that point, consider that AT&T, has been paying and growing their dividend for 30 years. They are the second largest telecom provider based on market cap, second to Verizon (NYSE:VZ). Barring some unforeseen negative scenario, safety of that dividend need not be questioned. So, with the current high yield and long term history for consideration, I can justify a purchase because AT&T's dividend consistency outweighs its dividend growth.
Here's another way to look at. Using my current position in McDonald's for comparison, it would take approximately 3 - 6 years for a yield to grow to around 7%. Using my position in Coca-Cola, as another example, I would need to wait 8 - 9 years for a yield on cost to reach 6%. In contrast, I don't have to wait that long for a 5% yield on cost with AT &T; it's available now.
AT&T's growth prospects are not stellar and it is not expected to outpace inflationary pressure. However, the current high yield is very appealing. The company is currently undervalued relative to the overall market, but technically is slightly extended. Shares of AT&T should appeal to income oriented investors who require income now. Although I don't need the income, I could use the income stream to purchase shares in other companies to continue building and diversifying my portfolio.
So, AT&T is on my radar for a purchase, knowing full well not to expect my investment to grow by much over the next decade, but I can redeploy future dividends towards purchasing shares in other companies that have better growth prospects. However, I will wait until my technical conditions favor a more appropriate time to purchase.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.