A recent Seeking Alpha article extolling the virtues of owning AT&T Inc. (NYSE:T) for the long haul got me wondering if the author’s claim that you simply can’t lose on T stock was accurate.
The foundation of Quad 7 Capital’s argument is compound interest, something that applies to all dividend-paying stocks, not just AT&T.
“Compound interest is the eighth wonder of the world,” according to a famous quote often mistakenly attributed to Albert Einstein. “He who understands it, earns it … he who doesn’t … pays it.”
While there isn’t proof the physicist ever said anything about compound interest, let alone hailed it as one of the world’s greatest inventions, I think it’s safe to say most investors understand the concept.
If AT&T pays you $1.96 in 2017 dividends for every share of T stock that own and then you reinvest those dividends, the new shares acquired as a result of the quarterly shareholder reward pay additional dividends substantially increasing the value of your holdings over time.
It’s simple math.
How Has T Stock Done Since 2005?
Quad 7 Capital has apparently owned AT&T stock since September 2005. At the time, T stock paid a quarterly dividend of $0.3225 per share. Fast forward to today, and it pays $0.49 on a quarterly basis for a 3.6% annualized total return over 12 years.
“Equity returns have two components: capital gains (price increases) and dividends. Add them together, and you have the total return for a stock,” wrote the Canadian Couch Potato in 2011 debunking one of the biggest myths of dividend-paying stocks. “Ignoring taxes and transactions costs, a stock that pays no dividend but increases in price by 6% provides precisely the same return as one whose share price rises 4% and pays a 2% dividend.”
To understand precisely how well AT&T stock has performed over the past 12 years, we also need its figure out its capital appreciation during this period.
According to Yahoo Finance, its price on Sept. 1, 2005 (adjusted for splits and dividends) was $12.84. Its Sept. 1, 2017, closing price was $37.48, which translates to a compound annual growth rate of 9.3%. Subtract the 3.6% annual return for dividends, and you get 5.7% capital appreciation.
That’s a fantastic balance between dividends and capital appreciation and a big reason why income investors love AT&T stock.
But is it Enough?
However, it isn’t if you consider that in those 12 years, its long-term debt has grown by 17.2% on an annualized basis. It was $26.1 billion in 2005, $132.8 billion at the end of June, and it will be $175 billion by the time the Time Warner Inc (NYSE:TWX) deal gets done in 2018.
AT&T’s debt’s grown at almost twice the rate of its stock’s total return. With interest rates on the rise, it’s a lot of debt to add to an uncertain outcome.
Consider the Alternative
Domino’s performance on an annualized basis since Sept. 1, 2005, the same period I used for AT&T, was 26.3%, almost triple AT&T’s performance over the same period.
Domino’s long-term debt at the end of 2005 was $702.4 million. By the end of 2016, it was $2.1 billion, an annualized growth rate of 9.6% or almost half AT&T.
Also, Domino’s has doubled its annual dividend from $0.80 in 2012, its first year paying one, to $1.84 in 2017.
Bottom Line on T Stock
The fact is, you can lose owning AT&T stock, and at no time has this been truer than since it announced it was buying Time Warner, a deal that’s not guaranteed to keep the good times rolling.
Frankly, AT&T will be lucky to generate 9.2% annual returns in the next 12 years given the debt it’s heaped on its business. Regardless of the cash flow generated by adding Time Warner to the pile, AT&T is anything but a risk-free investment.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.