Telecommunications stocks generate tremendous cash flow because (most) people pay their phone bills every month. Indeed, the deal in so much cash that there’s still plenty leftover even after gargantuan expenses to build and maintain networks.
With a yield of 5.2%, AT&T (T) is routinely one of the top 10 dividend stocks is in the S&P 500, but given how much free cash the telco generates, it could probably be No. 1 if it wanted to. T had $22 billion in capex over the last 12 months, it paid more than $9 billion to pay off debt and shelled out nearly $10 billion in dividends. Interesting,
And yet, after all that, T still generated more than $14 billion in levered free cash flow in the past year. Not only can investors can feel comfortable with T’s ability to swallow DirecTV (DTV), but the numbers also suggest that T can easily juice its dividend.
T shares are breakeven so far in 2014, but look like they could rise on multiple expansion given that the P/LFCF and P/E both look cheap at about 12. No, slow growth means AT&T won’t get a really big multiple, but the cash flow suggests solid future earnings growth and higher dividends too, and that should buoy T stock.