On the downside, historically T has never traded below a P/E of 11 since last recession. Therefore, the P/E of 11 becomes our worst case support for this stock and translates into a risk of additional 9% downside from Friday's stock price.
In this Part 2 article, I will go over the valuation of AT&T's stock (ticker: T) and why I think it is a bargain at the current price. Since I'm writing this article on my Sunday night, I'll be using Friday's closing stock price for all the data and charts. If you missed the first part of this article where I made the case that last week's 6% decline is only temporary and there is more to AT&T than just a telephone company, you can read it here: Part 1
I feel pretty confident about the fair value of $40 as in addition to the 30 Analysts estimates that FastGraphs uses for FV calculation, the MorningStar also has a fair value of $40 for T:
I bought T stock on Thursday (at the 6% correction) and then some more on Friday as the stock price stabilized. Even if the stock further declines on Monday or even the coming days, I still feel that I got a pretty good deal on one of the blue of the blue chip companies while earning a juicy 5.5% dividend yield.
At the current stock price, T shares are yielding at 5.5% dividend which is higher than its 5 year average yield of 5.30%. So, I am definitely getting a bargain yield.
What about Dividend Health?
Well, let's take a look at how T has paid dividend historically. The two FG charts below shows the last 20 years of dividend history (light green line) as a function of earnings and FCF (Free-Cash-Flow).
You can see that the dividend line has been constantly growing for the past 20 some years, even during the last two recessions. As a matter of fact, during the last two recessions, as the earnings and the FCF plummeted, T continued to not only pay dividends, but even increase it.
Isn't that something? How many companies can afford to increase dividends when the world is falling? This also shows the commitment of T's management towards its shareholders.
|T Dividend Growth vs. Earnings (green area)|
|T Dividend Growth vs. FCF (green area)|
Some may say, well T has increased its dividend by only 2% since the last recession, so it's not a great dividend growth play and there are other stocks with a much higher dividend growth rate.
That's fair, however don't forget that T has been paying a high dividend around 4.5% for the last eight some years while constantly increasing it. I believe T is the only dividend aristocrat that has payed such a high yield for such a long time.
Would you take a 2% yielder with a 10% dividend growth or a 5.5% yielder with a 2% dividend growth?
Wait! Before you answer, check out the graph below which calculates the dividend return based on the starting yield and the annual dividend growth while re-investing dividends.
I would take T over a 2% yielder with 10% dividend growth anytime.
What About Debt?
AT&T is essentially a non-regulated utility company that is also trying to be a technology and media company. Though, because of its utility nature, it requires a lot of capital to maintain and repair and upgrade its existing utility infrastructure, similar to what electric utilities do. Therefore, having a high debt is not necessarily a bad thing for a company like AT&T.
Having said that, if you actually compare AT&T's debt to its biggest rival Verizon, you will see AT&T has a far better and stronger balance sheet than Verizon or any of its other competitors. AT&T currently has a 49% Debt/Cap ratio vs. Verizon's 80%.
This is also reflected in the high BBB+ credit rating that AT&T enjoys and growing FCF that easily covers its current dividend payout.
For anyone concerned about T cutting dividends, think about what it will do to the entire Dividend Aristocrat universe. It would be like an earthquake of 8+ magnitude that would wipe out the confidence from the entire aristocrat list.
Therefore, I don't believe for a second that T would even think about cutting its dividend even if they run out of FCF or earnings plunge. They would borrow, sell assets, or do whatever to pay dividend. Though I don't think it will ever get to that.
I don't know what the T shares would do on Monday or the next day or the next week after its earnings report comes out. All I know is that AT&T is a solid company with a very long history of growth and paying dividends. For years, it has been like a staple stock owned by conservative income hungry investors and big institutions and funds who don't mind some growth while earning a stable, safe, and growing income.
I believe the recent dip in the stock price is a great opportunity to invest in this company while getting paid a very nice dividend.
Let me know your thoughts on the T or what I wrote in this article. Thanks as always for reading and commenting.
Disclosure: I am long T and VZ.
Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer