Some traditionally defensive names are having a great 2014 — the Health Care SPDR ETF (XLV) is up a market-crushing 27% — but the same can’t be said of some AT&T Inc. (T) and T stock. Sure, the whole telecoms sector is having a tough time. The Telecom SPDR (XTL) is up less than 3% for the year-to-date, lagging the S&P 500 by nearly 12 percentage points. But T stock is really doing very much worse.
Indeed, T stock is off 7.5% so far this year. Even after adding in the generous dividend yield of 5.4% (the highest in the Dow Jones Industrial Average), T stock still generated a negative total return in a very strong year for stocks.
And it’s not like AT&T ain’t trying. A couple of big, splashy acquisitions this year showed investors and the market that it’s serious about growth despite competing in a saturated industry. Results have been respectable, and — as ever — it’s a battleship of a dividend payer.
You could also make a case that the valuation on T stock is too compelling to pass up.
At the same time, AT&T has plenty of worries and challenges too, from intense competition to regulatory uncertainty.
So, should you consider buying T stock as part of your 2015 portfolio, or just stay away? To help decide whether T stock is a buy, let’s look at some of the pros and cons:
T Stock Pros
Dependable dividend. T stock is about as dependable and generous a dividend payer you can find. Gushers of free cash flow ensure the payouts will keep coming, just as they have for the last 30 years. Furthermore, the dividend is so fat that T stock is always one of the highest yielding dividend stocks in the S&P 500 (and No. 1 in the Dow).
Long-term outperformer. Thanks in part to the generous dividend, T stock absolutely crushes the broader market on a total return basis over long periods of time. Over the last 10 years, T stock generated a total return of 122%. The S&P 500’s total return came to 73% over the same span. That’s the kind of outperformance you look for in a retirement stock.
Wheeling and dealing. The telecoms industry is going through one of its regular periods of upheaval. Cable giant Comcast Corporation (CMCSA) is acquiring Time Warner Cable Inc (TWC). Verizon Communications Inc. (VZ) closed its acquisition of Verizon Wireless early in 2014. But AT&T isn’t standing still, striking deals to buy DirecTV (DTV) and the third-largest wireless carrier in Mexico.
T Stock Cons
Price wars. The North American market is saturated and then some, so there’s pretty much no way for telecoms to grow subscribers and market share without stealing from the competition. Slashing prices naturally hurts wireless-service margins — and by extension profitability — which is something AT&T warned would happen in the fourth quarter of 2014.
Churn. Signing up new customers is hard enough. Keeping them is even tougher. Subscriber cancellations are a bugaboo for all wireless companies, and T is suffering more than their fair share recently. Indeed, AT&T just warned investors that churn (service cancellations) will grow year-over-year even as the total subscriber base grows.
Valuation. T stock is by no means expensive — to say nothing of being overpriced — but it sure doesn’t scream bargain-basement buy. Shares go for about 13 times forward earnings. Sure, that’s cheaper than the broader market, but then AT&T’s long-term growth rate is only half that of the S&P 500. It’s also pricier than main rival Verizon.
T Stock Verdict
AT&T is doing a good job shoring up its balance sheet and generates more than enough levered free cash flow to keep the generous dividend coming. If all you’re looking for is income, you probably won’t be disappointed with T stock.
The negative total return generated by T stock this year is disappointing and almost a shock. After all, it’s been a very good year for the market and the T stocks dividend means the price really has to lag for this name to be a loser.
As a very long-term income play, T stock looks like a fine choice — a sort of set-it-and-forget investment. But if you’re looking for shorter term tactical outperformance as we get set up for a new, you can safely leave T stock off your 2015 buy list.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
