AT&T Inc. (NYSE:T) finds itself in a changing industry.
The landlines and cable services that once formed a considerable moat now see customers cutting these services in record numbers as various wireless and internet services start to fulfill these needs at a lower cost. And while its wireless service forms a new moat, that industry faces intense competition and a costly 5G upgrade.
Even with these challenges, however, T remains a buy for one reason— dividend cash flow. With T stock, you can enjoy the returns that banks used to pay with only a little more risk.
T stock Earnings Report Should Offer Few Surprises
Analysts expect to hear more about cash flows when AT&T reports its fourth-quarter and annual earnings after the bell on January 31st. The company tends to meet consensus estimates on average. But whether T will beat or miss earnings this time remains unknown.
What is known is that T serves as a conservative, reliable source of cash flow.
The company’s fiber-based internet and wireless businesses provide a substantial moat. Yes, customers dropping U-Verse TV service and wireless competition remain noteworthy challenges. But the company is mitigating these losses by merging with Time Warner Inc (NYSE:TWX), which will increase subscribers and remove a key competitor.
For the foreseeable future, people will always need internet and wireless service. Consumers, in this case nearly every American, can only turn to a handful of providers. With the considerable barriers to entry, new competitors emerging remains unlikely. And the subscription base for both wireless and internet only continues to grow.
T Stock Is The New Bank
These wireless and internet subscriptions provide the basis for company cash flow. T pays an annual dividend of $2 per share. This gives the stock a dividend yield of about 5.2%. Moreover, this dividend has increased every year since 1984. Given its decades of stability, the company ending its streak of dividend increases remains unlikely.
What this means is T stock is today what a bank account was in the late 20th century.
Back in the 80’s and 90’s, people could open a savings account and easily receive 5% interest rates on their money. With today’s sub-1% interest rates, the path to higher, safe returns lies in stable, high dividend stocks.
At a 5.2% return, T serves as one of these stocks. While the cash invested will face more risk than an FDIC-insured account, this high dividend provides a disincentive for massive selloffs.
In addition to the lack of principal protection, investors should not expect a lot of stock price movement. T stock price has seen very little lasting movement over the last ten years. In February 2008, the stock traded around $38 per share, within a dollar of today’s price. Analysts expect a 2-3% increase in both revenue and earnings growth for 2017, which will do little to increase the stock price.
AT&T does face revenue challenges as intense price competition from T-Mobile US Inc (NASDAQ:TMUS) has hurt their market share. Its peers Verizon Communications Inc. (NYSE:VZ) and Sprint Corp (NYSE:S) have also struggled. Moreover, as profit growth remains difficult, they face a 5G upgrade that’s expected to cost the industry at least $300 billion.
Once 5G becomes operational, new wireless applications will emerge that remain impossible today. The T stock price could easily benefit at that time. In the meantime, investors should enjoy their high dividend yield and leave their principal in AT&T stock.
The Bottom Line On T Stock
Given a stable, growing dividend, investors in T stock will enjoy strong cash flows for years to come, but little else.
As the company faces its next earnings date, cable cutting, price competition in wireless, and the expensive upgrade to 5G will weigh on AT&T.
However, its wireless and fiber-based internet services still give the company a large moat and continued cash flow. And T stock’s continuous dividend growth has taken yields to 5.2%, a yield that will grow over time for those that buy today.
Due to T’s stability and dividend growth, investors should take their long-term savings to AT&T—and not the bank.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
