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AT&T: A Dividend Aristocrat Positioned To Beat The Market Over The Next Decade

Jun. 10, 2020 9:26 AM ETAT&T Inc. (T)75 Comments
Kody's Dividends profile picture
Kody's Dividends


  • AT&T has raised its dividend for 36 consecutive years and the dividend remains highly sustainable with an adjusted EPS payout ratio around 62% during Q1 this year.
  • While adjusted EPS slightly declined in Q1 2020 and FCF declined in Q1 2020, AT&T continues to throw off more than enough cash to meet its upcoming debt maturities.
  • In addition, AT&T is trading at a 6% discount to fair value based on data sourced from I Prefer Income, as well as Morningstar's most recent report.
  • Between its 6.4% yield, 3.0-4.0% annual earnings growth potential, and 0.6% average annual valuation multiple expansion, AT&T is positioned to meet my 10% average annual total return requirement over the next decade.

Image Source: I Prefer Income & I Prefer Income Filter

In an uncertain operating environment such as the one we currently find ourselves in as a result of COVID-19, it is more important than ever to seek out high-quality companies that have been able to steadily increase their dividends regardless of economic or political conditions.

Filtering for a yield of greater than 6% and for stocks that have raised their dividends for 25 years or more, I was able to narrow down I Prefer Income's database of Dividend Diamonds from 134 to just 5.

Today, I'll be discussing AT&T's (NYSE:T) dividend safety and growth profile since I last covered the stock in March, examining AT&T's recent operating results and the risks associated with an investment in the stock, as well as the valuation aspect of an investment in AT&T by using a couple of valuation metrics and a fair value estimate from Morningstar to determine the fair value of AT&T's shares.

Despite COVID-19, AT&T's Dividend Remains Sustainable

While I believe it is always prudent to examine a stock's applicable payout ratio, it is even more important to do so when a stock's yield is over 3 times that of the S&P 500's as is the case with AT&T.

In the first quarter of this fiscal year, AT&T generated $0.84 in adjusted EPS against dividends per share of $0.52, for an adjusted EPS payout ratio of 61.9%.

According to page 27 of AT&T's investor briefing, AT&T generated $8.866 billion in operating cash flow during Q1 2020 against capital expenditures of $4.966 billion, for total FCF of $3.900 billion.

Against the $3.737 billion in dividends paid out during that time, this equates to an FCF payout ratio of 95.8%.

Although AT&T's respective payout ratios of 61.9% and 95.8% for the first quarter of this

This article was written by

Kody's Dividends profile picture
Hi, my name is Kody. I run Kody's Dividends. As you might guess, this is a blog primarily documenting my journey towards financial independence using dividend growth investing as the means to transform the dream of financial independence into a reality.I am forever indebted to this community because it helped me transition from simply being an investor to being an analyst for The Motley Fool back in June 2021 under my real name of Kody Kester. As a display of my gratitude, I will still be writing one article a month for SA starting in July 2022.

Analyst’s Disclosure: I am/we are 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (75)

Fantastic article, one of the best I've ever read on here.
Kody's Dividends profile picture

Thanks for reading and I'm glad you found value in the article!
64transformation profile picture
NO need to read someone who thinks 4 cents a year is a dividend aristocrat. Utter lunacy.

The "Dividend Aristocrat" label comes from increasing its dividend every year for over 25 years. But of course you know that.

Further, the annual dividend at $2.08 per share provides a yield of over 6.5%......and THAT'S an "Aristocrat" success story.
Lol and school is in session.
Kody's Dividends profile picture

Thanks for commenting.
zito profile picture
I think pauper not "aristocrat" best describes T. This stock that is down 7% over the past 5 years, while the S&P is up 54%company. The only good thing I can say is that the CEO that lead this mess is gone. Why bottom feed on T when VZ is reasonably priced?

Now do a 20 year comparison even with dividends reinvested.

Even worse.
This is why if you own a stock that has underperformed for 5 years you sell it and buy one that outperforms...This got me out of junk and into stocks that outperform. Out of F and into TSLA...Out of M and into AMZN...Out of T and into VZ....Out of S and into AAPL
Kody's Dividends profile picture

Thanks for the comment.
Nice review with which I agree. T will be providing us with more than 60K annually when I retire- and I will probably be adding additional shares as it is still a buy at today's price.
Wow, 28000+ shares shows commitment to the company.
Kody's Dividends profile picture

Thanks for commenting and I'm glad you enjoyed the article. It's great to hear the perspective of someone with 28k shares as mark pointed out!
Kody's Dividends profile picture

No kidding. That's some serious skin in the game. Thanks for commenting.
jgrever621 profile picture
I consider T to be safe money with a good dividend. Growth here seems far less likely much less a solid gainer over the next decade.

Mostly I am lukewarm due to the entertainment portion, where I think T just doesn't understand the market, management moves seem too slow, and management just doesn't understand the businesses at all.

Still, the dividend seems safe, grows abet slowly but steadily, and chances are the dividend increases will continue. So I keep it. Not adding more at thiss time.
Kody's Dividends profile picture

Thanks for the comment and I completely agree with your thoughts on the dividend.
Buyandhold 2012 profile picture
I love Ma Bell.

I've been a loyal shareholder for 46 years.

Ma Bell can ring my bell any time, any place.
My TSLA stock just went 84 dollar just today

In 46 years of holding T it’s 32 and change...Ouchie
Kody's Dividends profile picture

Thanks for commenting and congrats on nearly half a century of owning this blue-chip!
Basit Saliu profile picture
Go $T up to $60 and beyond!
Kody's Dividends profile picture
Basit Saliu,

Thanks for commenting.
The ignoramuses running T better rethink the decision to let Time Warner and HBO basically "erase history" by delegating Gone with the Wind to the deepest darkest storage area they could find. This woke BLM bullshot needs to come to and end right fricking now. T BOD is going to find itself losing money and at the receiving end of a stockholders lawsuit for failure to perform their fiduciary duty if the don't end this now.
nerd_rage profile picture
Well that's just the latest in a string of boneheaded decisions. Of course now everyone is up in arms about it all across the internet and there goes a whole bunch more potential HBO Max customers.

But T made far worse mistakes. HBO Max is still not on Roku. By the time they get onto Roku, the only folks who remember them will be the ones mad about GotW.
Kody's Dividends profile picture

Thanks for commenting. I was also quite disappointed by T's decision to concede to the woke culture out of fears that they'd be in the line of fire if they didn't try to show their "wokeness." Moving Gone with the Wind to the deepest and darkest depths of HBO Max, a movie that led Hattie McDaniel to become the first African American woman to win an Oscar, was a boneheaded decision to say the least.
Kody's Dividends profile picture

Thanks for the comment.
Marrk profile picture
Thanks for the article.

Long T and added at $27.
Nice I add under 30 and almost to my humble 1k a year income. It's in the boring yawn but keeps on paying me part of the portfolio. If only VZ would get more of a discount and coke
Kody's Dividends profile picture

Thanks for commenting and I'm glad you found value in the article. Congrats on your addition at $27 a share as that will be a very favorable pickup in the years ahead.
Kody's Dividends profile picture

I hear you. I only own fractional shares of VZ and KO as they very rarely seem to be priced attractively and I missed the boat on them in March when they were priced attractively in absolute terms.
"A Dividend Aristocrat Positioned To Beat The Market Over The Next Decade"

Yeah.....good luck with that.
Depends on what the market does...
Kody's Dividends profile picture

Thanks for commenting.
craigimass profile picture
The cost of entry into the market (at scale) is so high that only T and Verizon are likely to dominate the central services (they sell to other companies) for many many years.
If T history is any indication, this will be for many decades.
In any case, given the low returns on bonds, etc. the reward is definitely worth the risk IMHO.
DIVPLUS profile picture
No one ever seems to take notice of Elon Musk’s Starlink as a future challenger to T and VZ.
Booban profile picture
@DIVPLUS Starlink isnt going to compete on that scale, it wont be cheaper. Its for harder to reach areas on Earth.
Well no offense but Elon has a fantastic habit of over promising and under delivering. it saying he's a con man but irrationally exuberant? IMHO yes.
LONG T since 2007...DRIPPING all the way to RETIREMENT $$$😁👍
Kody's Dividends profile picture

Thanks for commenting and congrats on owning a Dividend Aristocrat for well over a decade now.
popster76 profile picture
My answer is to own both T & VZ in my portfolio as both companies aren’t going anywhere and the dividends help fund a comfortable retirement.
Kody's Dividends profile picture

Thanks for commenting and I agree that both T and VZ are solid bets for a DGI portfolio.
T? Not me. VZ is a major competitor. Plenty of other competition for phone and entertainment. T used to be a monopoly offering good inexpensive telephone service. Now we have "plans" and poor signals from expensive cell phones that need replacement frequently. T was a good solid income stock. Now? Big gamble, high debt, "communications" company . Who wins? Executives that run it with high salaries, perks, and bonuses. Buy it and gamble. Who loses? The USA saddled with high personal cost just to make a phone call.
craigimass profile picture
You must have not been around when 2 lines in your house cost about $150 a month (350+ in inflation adjusted money)......cell rates are a deal.
Basit Saliu profile picture
T gain postpaid subs after many years while VZ lost postpaid subs after many years.
g.dimit profile picture
Could not go wrong with either one AT&T or vz
Both will be outstanding for steady & Reliable
Dividends during the Golden Age.
Basit Saliu profile picture
This is for haters and bears of $T
Note: AT&T ($T) have the cash to invest in its businesses, pay off debts, reward shareholders, and ready for future.
Kody's Dividends profile picture

Thanks for sharing!
AnthonyGiordano profile picture
I own VZ but not T as I shy away from it due to debt levels but you make a case for owning it long term. I am reconsidering T as part of my portfolio. Thanks for the article.
Basit Saliu profile picture
T>VZ any day.
@Basit Saliu

On what factual, fundamentals financial metric(s) is T > VZ??
Basit Saliu profile picture
OCF, FCF, Revenue, and Diverse businesses that why T>VZ any day. And both have $100 billion plus in debt.
People are really using that Aristocrat term to death.
@Kody's Dividends, thanks for a fine article.

@Jake Voss, I agree. Aristocrat is a historic term. What really matters is the management team. AT&T management has certainly pulled some boneheaded moves over the years. However they appear determined to pay down debt. If they do, and can make marketable products, T at today's price should be a sound investment. I would feel better about owning T stock if management's (very rich) compensation consisted largely of restricted (say 5 and 10 year holding periods) T shares. This should not be a problem for managers if those shares will continue for years to produce stable or rising dividends.
Kody's Dividends profile picture
Jake Voss,

Thanks for commenting and admittedly, you're probably right that it is an overused term.
Kody's Dividends profile picture
MassSpec Guy,

Thanks for the comment and I'm glad you enjoyed the article.
Dividend aristocrat T, good yield nice long term company.
Kody's Dividends profile picture
Money 29,

Thanks for commenting and I absolutely agree!
Basit Saliu profile picture
5g Mobility, Fiber Internet, HBO Max, OCF and FCF, One AT&T. GO T!
With T caving on programming, I cannot see how they think they will get long lasting revenue streams.
Basit Saliu profile picture
10,000 hrs of content is not caving...And HBO Max is a long term plan. $T have many money-making businesses.
Kody's Dividends profile picture

Thanks for the comment.
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