AT&T (NYSE:T) finally is getting some love, with shares pushing through multiple resistance levels. I have been pounding the table on AT&T stock below $30 and we’re finally seeing that bet pay off. Not that we haven’t been compensated in the meantime with T’s massive dividend yield, which is still at 6.4%.
The big question from those that have been on the sidelines: Is it too late to buy AT&T stock?
The short answer is no, and those investors will likely get a better chance than what T stock currently offers. Investors are turning cautiously optimistic on the name, as the share price inches higher. Just a few days ago, AT&T stock gapped higher and has been treading water near $32. If we get a slight pullback down to $31 (which is very doable in my view) investors could be looking at a setup that has 10% upside in the stock price while getting paid more than 6.5% from AT&T’s dividend yield.
Why Buy AT&T Stock
The first thing many investors look at with AT&T stock is the dividend. Since this yield is elevated vs. T’s historical yield, the average dividend yield in the market and its peer Verizon (NYSE:VZ), many investors next look at the balance sheet. Admittedly, AT&T is a bit bloated, carrying $167 billion in long-term debt. However, that’s down about $3.1 billion from the prior quarter.
Some investors will say, “So what? The debt is still massive!”
That’s true. But a near 2% reduction quarter-over-quarter after just closing its massive $85 billion Time Warner acquisition isn’t bad. Management has stressed multiple times at this point its intentions to pay down debt and maintain its dividend payout.
AT&T still has some divesting potential, like selling its Hulu stake to Disney (NYSE:DIS), that will allow it to pay down debt, and its free cash flow (FCF) is very strong. The Time Warner deal will boost this metric and really, that’s what matters. Strong FCF can be used to pay and raise the dividend, and more quickly pay down debt.
As it stands, AT&T stock trades at just under 9 times this year’s earnings, while analysts expect modest growth this year and next. We’re not in this name for the growth though. We’re in for a high dependable yield that we can find in few other places. AT&T has not only paid, but has actually raised its dividend for 35 straight years. That gives us confidence the payouts will continue higher.
In late-March, Raymond James upgraded AT&T stock to outperform and slapped a $34 price target on the name. This is a realistic upside target given that some of T’s negative catalysts are dying down and positive catalysts are taking hold.
Trading T Stock
I wanted to show both a weekly chart, which is above, and a daily chart below. This helps investors see multiple levels and different moving averages. It also helps show where potential support and resistance levels may rest.
For instance, On the daily chart below, you may notice that AT&T stock is now above all of its major moving averages. Shares can really heat up now, right? Perhaps. But notice on the weekly chart the 100-week moving average is holding T stock in check. Should it push through, it has the 200-week moving average near $32.75 that could keep a lid on it.
So how do we do we trade this mess? Well, the setup is actually quite simple. T stock has been very orderly over the past few years. For the most part, downtrend support has buoyed AT&T stock on each test over the past few years. On the upside, downtrend resistance has been very consistent and limited the stock’s run.
For bulls, it would be incredibly healthy to see AT&T stock pullback to its prior breakout zone and hold that level. Should this development occur, it sets up for a bigger move later this year and $33+ is a reasonable expectation. Further, a pullback to this area will land T stock near its 200-day moving average at $30.71. However, within about 25 cents sits the 20-day, 50-day and 100-day moving averages.
Along with prior resistance, these moving averages should support AT&T stock. If so, this is the perfect buying opportunity in T stock for 10% upside and a 6.5% dividend yield.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Kenwell is long T.