AT&T Corporation (NYSE:T) has been struggling big time this year, with T stock down more than 17% so far in 2018. After a federal judge gave the green light to AT&T’s acquisition of Time Warner, some investors thought it would jumpstart the stock.
That hasn’t been the case, with shares languishing in the low-$30s. That’s despite the recent uptick in shares of Verizon Communications Inc (NYSE:VZ), as well as other high-yield stocks catching a bit of a boost. For once, a rise in interest rates from the Federal Reserve isn’t drowning these names, which could bode well going into the second half of 2018.
In any regard, what does it mean for T stock and should investors buy the stock near current levels? Let’s look at the charts before taking a peak at the fundamentals.
Trading T Stock
Click to Enlarge
I felt it best to zoom out on T stock, so I’m using a five-year weekly chart above.
You may notice that T stock is still in a descending channel. While the top of that channel can be debated, the bottom is crystal clear. The only question I have about T stock is whether it will work its way down to the $30 mark. If so, I believe that T stock will become a high-conviction buy.
For two years between 2014 and 2015, the $30 level was stiff resistance for T stock. Should we find shares back down near this level, it should act as support. To get there, AT&T shares would need to decline by roughly 6.5% from current levels. With earnings due out on July 24, perhaps that will be the catalyst to bring T stock down.
Conversely, though, investors could be de-risking their portfolio, shedding high-debt companies like AT&T. (For what it’s worth, higher interest rates are bad for T stock in this regard too, as debt becomes more expensive.) However, should management tell a positive story about its business and its new Time Warner addition, then maybe investors will flock to the stock post-earnings.
Given the market environment and how T stock has been trading, though, I’d prefer not to roll the dice. However, aggressive bulls could take a shot on AT&T near current levels. Perhaps they could justify it with a partial position, given that T is technically sitting on trend-line support right now.
Conservative bulls may want to wait to see if $30 is visited. If it gets there, I would expect that level to hold and provide a bounce to T stock (at least initially).
Evaluating the T Stock Dividend
An interesting note on T stock: Should it actually fall to $30 per share, it would yield a whopping 6.67%.
This level becomes even more interesting when you consider the last 30 years of AT&T’s dividend. Let’s not forget that AT&T is a dividend champion too. It’s not only paid a dividend, but has raised its annual payout for 34 straight years. So through high inflation, low inflation, recessions and bubbles, one thing investors could count on was getting their annual dividend.
Going back over the last three decades, T stock has only had a dividend yield of 6.9% or higher twice. It hit that mark in 1988 and momentarily passed 7% in 2008, amid the Great Recession. We’re far from another Great Recession right now and, should T stock fall to $30, its ~6.7% dividend would be near the far end of its long-term range.
In order for it to return toward its average yield, one of two things would need to happen. Either AT&T would need to cut its dividend (unlikely at this point, no matter the debt load) or the stock would need to rally.
Should the company release a quarterly update that shows its balance sheet isn’t too bloated, investors should seemingly breathe a sigh of relief.
The Bottom Line on T Stock
Analysts are factoring in about 7.5% revenue growth this year and next year. That goes along with about 11% earnings growth in 2018 and almost 4% next year. The big question will be cash flow and whether its increase will be enough to pay down debt and bump the dividend.
Assuming it is, then there’s really not a lot of reason to be overly bearish on T stock. If we can scoop up a 6.5% yield, more than double the 10-year Treasury, trading at less than 10 times earnings, why shouldn’t we?
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.
