Recent Buy – AT&T Inc (T)

I initiated a new position in AT&T Inc (T). AT&T barely needs an introduction being the behemoth ($184B market cap) in the telecommunications sector. AT&T is one of the 30 companies that compose the Dow Jones Industrial Average (DJIA), a yardstick to measure the health of the economy. This is my fourth DJIA stock in my portfolio following Chevron (CVX), General Electric (GE) and Johnson & Johnson (JNJ).
I initiated a position in AT&T with 40 shares, and with a yield of 5.16%, which adds $73.60 to my annual dividend income. This is about half the position I am comfortable owning in each stock and will be looking to add more in the future if better opportunities appear.

Corporate Profile (from Yahoo Finance)

AT&T Inc. provides telecommunications services to consumers and businesses in the United States and internationally. Its Wireless segment offers various wireless voice, data, text, and other services, including local wireless communications services, long-distance services, and roaming services. This segment also sells various handsets, wirelessly enabled computers, and personal computer wireless data cards through its owned stores, agents, or third-party retail stores; and accessories comprising carrying cases, hands-free devices, batteries, battery chargers, and other items to consumers, as well as to agents and third-party distributors. As of December 31, 2013, this segment served approximately 110 million wireless subscribers. The company’s Wireline segment provides data services, such as switched and dedicated transport, DSL Internet access, network integration, managed Web-hosting, packet, and enterprise networking services, as well as local, interstate, and international wholesale networking capacity to other service providers. This segment also offers voice services consisting of local and long-distance services; wholesale switched access services to other service providers; and outsourcing services, integration services and customer premises equipment, and government-related services. This segment served approximately 12 million retail consumer access lines, 10 million retail business access lines, and 2 million wholesale access lines. The company has strategic relationship with IBM to provide businesses with a source for network security and threat management. The company was formerly known as SBC Communications Inc. and changed its name to AT&T Inc. in November 2005. AT&T, Inc. was founded in 1983 and is based in Dallas, Texas.

Dividend Profile

AT&T is a Dividend Aristocrat & Dividend Champion having raised dividends for 30 years in a row. The stock is a high yielder (current dividend is 5.31%) and as a result, the dividend growths are comparatively smaller. The 5-yr dividend growth rate (DGR) is 2.4% and 10-yr DGR is 4.9%.

Recent Buy Decision

Investing in AT&T bolsters my portfolio with more exposure to the telecom sector – which I am bullish on. The company is the leader in the telecom world, but the current environment provides for some interesting points. Some of the factors that contributed in my decision to initiate this position.

  • Dividend income – AT&T provides great current income with prospects of dividend growth in the future.
  • Dogs of the Dow – Some people use this investing strategy to beat the market. While my main goal is not to beat the market, this strategy provides some visibility into the under-to-fairly valued stocks in the DJIA. The strategy, for those unfamiliar, is simply to invest in the highest yielders of the DJIA called the Dogs of the Dow. AT&T is the currently the highest yielder in DJIA.
  • Solid revenue growth & EPS growth: After minimal gains from 2009-2012 in revenue, and a dip in diluted EPS from 2010 to 2011, AT&T has turned the ship around and the current trend is pointing upward.
  • DirecTV (DTV) acquisition – AT&T announced that it intends to acquire DTV, which could provide with considerable amount of revenue growth in the future.
  • Possibility of REIT spinoff – The recent news of Windstream (WIN) spinning off a publicly traded REIT resulted in speculation that other telecom providers would follow suit. If AT&T follows in the footsteps of WIN, that would result in unlocking a lot of value for shareholders.
  • In-Car 4G LTE – AT&T has been at the forefront in this field having secured deals with car manufacturers such as Audi, Tesla (TSLA), General Motors (GM) etc. AT&T could potentially add millions of new subscribers to their customer base as the current and future generation of cars come with a 4G LTE-capability.

The bottom line is that the companies that control the data pipes in an ever-connected and integrated digital world will command the marketplace. Telecom service providers (alongside cable service providers) will be able to throw their weight around and demand a piece of the pie from the hi tech media companies, as was evident from the recent announcement from Netflix (NFLX) – that Netflix has agreed to pay AT&T a fee to provide better streaming services to customers for an undisclosed amount. Read more about my thoughts here.

Risks

  • The DirecTV merger comes with a lot of unknowns. AT&T is betting that they can grow their revenues and business with the acquisition of DirecTV. However, it remains to be seen how this will play out once approved.
  • Capital expenditure is high and while T had indicated earlier this year on a free on capex, they have been forced to spend more in order to keep up and compete with others in the marketplace.
  • Free cash flow has dropped this year.

A summary of the stock

  • Symbol: T
  • Quote: $34.62
  • 52-week range: $31.74 – $37.48
  • P/E: 10.17
  • Forward P/E: 12.73
  • Debt/Equity: 0.91
  • Yield: 5.31%
  • 5-yr average yield: 5.5%
  • 5-yr DGR: 2.4%
  • Book value: 17.75
  • Graham number: 36.85
  • Chowder rule: 8

Do you own T? What are your thoughts on the sector and the industry? Make sure to leave a comment below.

Full Disclosure: Long CVX, GE, JNJ, T. My full list of holdings is available here.

22 thoughts on “Recent Buy – AT&T Inc (T)

  1. R2R,

    I like the move and it is my largest holding. I am starting to relook at T myself and may add more shares in the near future. I remember you sold SO a couple of months ago, but it might be worth looking at again in the high 30’s which would give you a 5.5% or so entry yield.

    MDP

    • Ive had my eye on T (and VZ) for a while and finally pulled the trigger – albeit a bit too early. Still, a 5.16% isnt bad and will be looking to add more later. Good to know that its your largest position – its such a great income play and the management is trying hard to focus on growth areas in the last few months.
      Thanks for the tip on SO – I’ll have to take a look at it again.

      regards
      R2R

  2. R2R,
    I like T here under $35. VZ is a big portion of my portfolio so I won’t be adding T to my taxable account. But possibly a retirement account. Between the two, they really dominate. Nice yield.
    -RBD

    • RBD, I would like to own VZ too and I think its a great company. For now, I am happy with T and will be looking forward to collect those juicy yields 🙂

      Thanks for stopping by
      R2R

  3. The Direct TV acquisition makes sense. Centurylink offers TV through its phone service and T will need to compete. My concern that has kept me away from them is their lack of international exposure and thus growth. But at a 5% yield its got a lot going for it.

    • Yes, that is a cause for concern PMU. A couple of years ago, AT&T (and VZ) looked at entering the Canadian market, but it didnt make sense for them since they realized that it wasnt worth the investment and there wasnt enough market room for a fourth provider. Hope the DTV and in-car service will provide enough growth for the next few years to come.

      R2R

  4. Glad to see you’re putting money to work buddy. While I’m not a big fan of the sector……T and VZ are going to be around (and paying dividends) for many years to come. Good work
    -Bryan

    • I hope its just my bias since I work in the tech/telecom industry, but I see a bright future for the service providers. While it may appear saturated, the amount of data is exploding and the companies that control the data pipes will benefit big time. I sure am looking forward to the juicy yields 🙂
      R2R

  5. I’ve been looking at T for a while now and might go on and add more shares here. The price is pretty good from a long term perspective. My concern is the actual growth lagging inflation over the long run but the DTV acquisition should allow for some higher growth at least in the short term once its incorporated.

    • You are spot on, PIP. I am hoping the DTV and in-car service will drive the growth over next few years. In addition, although I didnt write about it in the article, if the IoT catches on, the service providers will benefit from that. For now, I am happy with the 5+% yield and the smaller growth in dividends.

      Thanks for the input
      R2R

  6. I think you made a good decision. After hearing about the DTV purchase, I decided to initiate a position recently myself. I’ve had DirecTV at home for over 5 years and have been very happy with them. I plan to add to my AT&T position in my Motif account over the next week at these prices. Slow grower but great starter yield. I don’t mind having a few of these. I also bought more VZ recently.

    Cheers

    • Thanks AAI. Cant argue with the started yields and considering I own so many stocks that have a small yield and high growth rates, I figured it would be good to add one of the high yielders. Also, with the current market valuations and lack of opportunities, T is one of the stocks that is a bit more attractive.
      I will have revisit VZ in the coming months.

      regards
      R2R

  7. R2R,

    Nice buy here.

    I’m not a huge of telecoms, but I have exposure via T, VZ, and VOD. But I’m thinking about increasing my T position a bit. The DirecTV acquisition diversifies operations a bit, and you gotta love that juicy yield. 🙂

    Enjoy those fat dividends!

    Best regards.

    • DM,
      All great stocks for your portfolio. Telecoms have fallen out of favor lately and will probably suffer when the interest rates rise but its still a great long term play. The DTV acquisition will hopefully result in some good revenue growth.

      Thanks for stopping by
      R2R

  8. We own AT&T in two separate accounts. Can’t really complain about the consistent 5% dividends we get paid each month. Although the dividend growth is essentially non-existent. Overall, still a great stock and company to own. AFFJ

    • Roadmap2Retire says:

      I agree, AFFJ. A great stock to own even though it doesnt have a great div growth history. However, I am expecting the revenues to grow a bit from here on…which will hopefully expand their books and dividends in the future.

      Thanks for stopping by
      R2R

  9. Welcome to the team! I have owned T for several years now. I don’t expect much dividend growth from them, but keep them for the higher yield which enables me to collect dividends to invest in faster DG holdings.

    I don’t think you can go wrong. I am pretty comfortable holding the bigger telecom guys. I also hold VZ and VOD.

    Take care!

    • Thanks ILG. I admit that I was reaching a bit for the yield here, but considering that its AT&T and such a solid company – I decided that its a good move. I might add more if it gets really attractive, but for now, I am fully invested in the telecom sector.

      regards

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