- Most defensive equities have had money poured into them over the last 2 years, bringing yields down with them.
- There are always a few stocks that miss out on the party.
- AT&T offers a fantastic alternative, defensive stock, with a better yield, and better total return prospects.
As coronavirus fears continue to shut down travel, supply chains, and increase fear in the markets, we need to be careful with how we apply any dry powder. There also is the fact that OPEC is now fine with going into a pricing war with Russia due to them not joining the recent output cuts. Both of these combined could make for a true recession over the coming year or two. While the initial drop-off has been steep, I see it as somewhat justified, as a lot of stocks were flying at all-time highs.
I actually think there are a lot of great buys in the market at these prices, but since the downturn could be long, it's important to slowly use excess cash. I plan on buying what I see as the safest stocks that will come back just as strong or stronger after this correction/recession first. Then, moving down the ladder to stocks that could offer even better total returns but are a little too risky now until we see how everything plays out for a few months/quarters.
A lot of traditional consumer staple stocks and utilities have already been flying high the past couple of years as their yields and prices followed that of bond yields and prices. Fortunately, I still see a lot of quality companies that will make it through whatever coronavirus and OPEC can throw at the markets over the next couple of years while continuing to pay a dividend. This article is to go over one such company that offers a much higher, very safe yield, and more room for price appreciation in the coming years than say utilities.
AT&T is a Better Yielding Alternative, with More Upside
One reason AT&T (NYSE:T) has such an attractive yield (currently 5.6%) is that they are in very competitive, capital intensive industries. As if it wasn't already expensive enough to build out nationwide networks every 5 or so years as consumers consistently demanded faster speeds, AT&T decided to go buy Time Warner a couple of years ago to set up for entering the direct to consumer streaming market later this year. And as most everyone knows at this point, it's not just Netflix (NFLX) they're competing against in the streaming market anymore. It's other heavyweights such as Amazon (AMZN) and Disney (DIS).
Luckily AT&T picked up plenty of premium content with their purchase of Time Warner. The list of content includes HBO, TBS, TNT, CNN, Cartoon Network, and all the movies from Turner Classic Movies and the Warner Bros. While Netflix and Amazon have to license content and create plenty of new content, AT&T steps in as an immediate player, much like Disney did last year.
While AT&T had a great 2019, rising from under $30 to briefly over $39, they had struggled mightily the previous 2 years. Here is their stock price over the last 3 years:
To me, the biggest reason the stock price struggled was due to the debt load that AT&T took on to buy Time Warner. Once AT&T proved they could churn out cash and start paying down debt, the market rewarded them with a nice 2019. Here's their debt load over that same time frame:
Quite frankly, I'm scared to get into most stocks with heavy debt loads at uncertain times such as these. But as AT&T has shown over the last year and a half, they can pay down debt very quickly and get it to more manageable levels. Here are their free cash flows that allow them so many options in paying down debt, paying dividends, and investing in new ventures:
So, while I can see why the market has given a wait-and-see approach to AT&T and their purchase of Time Warner if they manage to hit the ground running with HBO Max and continue to churn out cash from their other businesses, I expect for multiple expansion and for their yield to drive down lower.
Most people will continue paying for their phone plans through any market conditions, making a large amount of AT&T's revenues/profits anti-cyclical. 2019 marked the start of the turnaround for AT&T, but they have plenty of room to run higher as I expect them to survive through tough times with their wireless business profits and strive during boom times with their soon to come streaming options.
I personally am going to slowly apply funds to stocks that I see as very safe through any market conditions first. I still am focusing on total returns though, which is why I'm staying away from stocks such as utilities. If bond yields push back higher in the next few years, I could easily see utilities and other traditional defensive sector yields going higher with them and thus prices going down. AT&T offers a very high, safe dividend that will keep on paying you through any price volatility while offering plenty of upside for the long term.
This article was written by
Analyst’s Disclosure: I am/we are long T, AMZN. 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.
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