Why I Will Never Sell AT&T Stock

AT&T (T) stock is cheap and pays a great dividend. Those two things force investors to take notice. Beyond that, though, is a strategic direction and corporate structure that has positioned AT&T stock for long-term success. That success spans well beyond this year, next year, or even five years from now, and is why I feel confident that AT&T stock will always remain in my portfolio as a core holding.

Consistent and Manageable Dividends

First off, if I am going to own a stock forever, I want a safety net of some sort.

AT&TA dividend is good, and a yield of 5.6% is great, but being able to afford that dividend with room for even higher dividends is greatest of all.

In the last 12 months, AT&T has generated free cash flow of nearly $12.3 billion; FCF is operating income minus capital expenditures. Meanwhile, based on AT&T’s 6.15 billion outstanding shares combined with a $0.47 per share quarterly payout, AT&T spends about $11.5 billion on dividends.

Therefore, without a doubt, AT&T can afford its dividend. However, AT&T’s free cash flow is about to rise significantly due to the acquisition of DirecTV and two purchases in Mexico. Recently, AT&T guided for FCF of $4.5 billion in the third quarter, about $1 billion better than last year.

The reason is because it added a DirecTV business that had FCF of $3 billion last year, and chances are that the $2.5 billion in annual cost cuts that AT&T expected from this deal are already starting to take effect. Thus, if we estimate that AT&T’s free cash flow moving forward can rise to $16 billion (AT&T has already guided for higher margins) then AT&T still has a lot of room to increase its dividend, pay off debt, or complete additional acquisitions to grow FCF further.

This is a luxury that I like to see in a long-term investment.

AT&T Is at the Epicenter of Businesses That Won’t Fade

With all things considered, having a big dividend means nothing if AT&T ultimately operates in an industry of instability, an industry where longevity is an uncertainty. Instead, wireless communication, broadband internet, and pay-TV are all businesses that are going nowhere fast.

AT&T is at the epicenter of the Internet of Things, a future where nearly everything becomes connected to the Internet. The IoT is an industry that will create $10 trillion-$15 trillion in global GDP over the next 20 years, and will increase global data consumption from last year’s 2.5 exabytes to 24.3 exabytes by 2019, according to Cisco (CSCO).

AT&T will capitalize as customers consume larger loads of data, thereby requiring larger data plans. Furthermore, by acquiring DirecTV and two wireless companies in Mexico, AT&T can expand and grow its business outside the U.S., both Mexico and Latin America. Lastly, with the acquisition of DirecTV, AT&T is now one of the largest pay-TV service providers in North America.

One of AT&T’s goals in acquiring DirecTV was to make video consumption possible anywhere, both at home and on the go. AT&T has the technology to make this goal a reality like no other company, owning both the wireless infrastructure and the content to create an unmatched mobile video experience long-term. With mobile video expected to rise from 55% to 72% of global data consumption by 2019, this play on video was apparently wise for the telecommunications giant.

With that said, it is not just the high dividend that’s appealing about AT&T stock, but rather its leading presence in so many services that makes it a forever investment. Much like Apple (AAPL) owns both the hardware and software of the iPhone, AT&T now owns the network that makes both wireless and broadband Internet function, along with an unmatched video presence, in three very large regions (U.S., Mexico, Latin America). At just 13 times next year’s free cash flow, AT&T stock is priced at a perfect entry point with a tremendous dividend to take advantage of these long-term opportunities, making AT&T stock the perfect buy, hold, and forget investment.

As of this writing, Brian Nichols owns shares of AT&T stock.

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