It hasn’t been a good run for AT&T Inc. (NYSE:T), with T stock down almost 15% so far in 2018 and 18% over the past 12 months. The question now is — should investors buy AT&T stock, in part for its big 6% dividend yield?
Worth pointing out is that Verizon Communications Inc. (NYSE:VZ) has done much better. While shares are down 4% so far this year, they’re actually higher by almost 7% over the past 12 months. For its part, investors are collecting a 4.7% yield.
Earnings would have been a perfect catalyst to stop the recent declines and get T stock back on track. Unfortunately, AT&T missed on earnings per share and revenue estimates. It’s left many investors scratching their heads and wondering what they should do now. Throw in the $26 billion combination of T-Mobile Us Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S) and there are even more questions on AT&T’s future.
Time Warner Acquisition
I wouldn’t say investors are overlooking AT&T’s quarter, but the big event they’re paying attention to is its acquisition of Time Warner Inc (NYSE:TWX). The trial between the Department of Justice and AT&T is set to come to an end this week, with a verdict possible in a few weeks. Remember, this is the massive $85 billion deal that AT&T is trying to pull off.
Its move to acquire DirecTV was seen as positive at first. But now, as the cord-cutting trend continues to hurt names like Walt Disney Co (NYSE:DIS) and boost companies like Netflix, Inc. (NASDAQ:NFLX), DirecTV is a loser too. Margins have come under pressure and now AT&T is stuck with a $48.5 billion acquisition that isn’t giving it the growth it was depending on.
Will Time Warner go down the same way? It’s unlikely, in part because it has HBO. While many still regard HBO as higher quality than Netflix, the latter pulls in more revenue and has better growth. Last quarter, Time Warner’s HBO reported revenue growth of just 3.3%, But operating income fell almost 12%. In fact, all three business segments had lower year-over-year operating income for Time Warner. Total revenue growth stood at just 3.4%.
Overall, these results aren’t very promising. But for AT&T investors, the focus really is likely on the cash flow. Free cash flow for the quarter totaled $1.2 billion at TWX, down $200 million from the $1.4 billion in the same quarter a year ago.
Make of it what you will, but based on the quarters from AT&T and TWX, one can see why investors may not be the most excited about T stock right now.
Valuing AT&T Stock
Maybe the eight-year weekly chart below is making something out of nothing. In other words, perhaps the trend line we’re using is irrelevant over such a long period of time. We’ll have to see how T stock trades going forward. Some are calling for a decline to $30 in T stock and should it happen, I imagine there will be plenty of support there to hold the stock up.
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For all the flaws with AT&T stock at this point, let’s remember that it still pays a dividend yield of 6%. Let’s also remember that AT&T has raised its dividend for 34 consecutive years. That’s right — through all the recessions, housing market crashes and interest rates surges, AT&T has bumped its annual payout for more than three decades.
At $30, AT&T would yield almost 7%. Even though its fundamental picture isn’t amazing, it’s hard to imagine the market letting this name get to a yield north of 6.5%. That’s more than double the 2.95% that a 10-year Treasury note pays. In other words, either T stock can’t sustain its payout — doubtful at this point — or AT&T stock should have limited downside.
Should $32 hold, bulls should consider buying. That’s despite flat revenue growth this year and next year (excluding TWX). Earnings estimates call for a 13% gain this year, mainly due to tax reform. However, T stock trades at less than 10 times earnings. For a 6% yield, income hunters could do worse. They could also consider owning VZ to diversify their risk while still collecting a solid yield.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
