Shares of AT&T (NYSE:T) have been on a tear lately, rallying from $30.50 at the end of May to north of $34 earlier this week. That 12.5% jump really got the attention of T stock investors, given what a slump this name has been in. In the first four months of the year, ATT stock had eked out a 4.2% gain while the S&P 500 index climbed 16.2%.
Of course, most investors ignore the valuation, the company’s various businesses and even its debt. Instead, they focus on the dividend, which still yields almost 6% even after the big rally we’ve seen. Should investors buy for this reason alone?
AT&T Stock and Its Dividend
Investors should view the dividend from T stock as very attractive. We’ve outlined why this payout is so tempting numerous times on InvestorPlace over the past year.
Basically, we’ve got a company that’s been super consistent with not only paying its dividend, but raising it as well. Including this year’s bump, AT&T stock has raised its payout for 35 straight years. That’s through recessions, uncertainty and big fluctuations in interest rates.
The stock now yields 5.96%, as of Wednesday’s close, and while attractive, it may not be attractive enough on that yield alone. After all, the stock is up more than 10% inside of a month. If investors buy in now, they risk taking a haircut on their principal. While some investors may only be interested in the income, we’re looking at T stock from a total return perspective.
T Stock Financials
A major concern for T stock has been the debt. Simply put, the company has a lot, currently standing at $167 billion in long-term debt. That’s a daunting sum for any company.
But consider that a bulk of this debt came from the company’s $85.4 billion acquisition of Time Warner (TW). TW had growing revenue and earnings, and strong cash flow. Investors may still be leery about AT&T because of this deal. That’s because one of its prior deals didn’t work out so great. It bought DirecTV for $48.5 billion in 2014. Now though, all anyone seems to focus on each quarter is how many subscribers AT&T is losing in this asset thanks to cord-cutting.
I wouldn’t worry about the Time Warner deal as much though. It kicks off great cash flow and puts AT&T in a better position, even with the larger debt load.
For instance, free cash flow (FCF) came in at $5.9 billion last quarter, up 107% year-over-year (YoY) from $2.83 billion. More importantly though, the FCF dividend ratio (or the percentage of FCF that’s paid out in the form of a dividend) fell from 108.5% in Q1 2018 to just 63.3% in Q1 2019. That’s a huge reduction and further pads the safety in AT&T’s dividend.
To be sure, dividend-loving ATT stock investors got nervous reading recent headlines. First, there was the rumor that Amazon (NASDAQ:AMZN) would buy Boost and compete in telecoms. Then it was that Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) would team with Dish Network (NASDAQ:DISH) to compete in satellite-delivered content. What ever. Right now, all we need to know is that FCF is strong and AT&T has consistent business. That should allow it cut down debt and pay out its dividend. At 10 times earnings, we can live with that.
On July 9, the company announced its plans for HBO Max, a service joining HBO Now and HBO Go. To me it would have made more sense to roll HBO Max’s selling points — adding Friends, Fresh Prince of Bel-Air, Pretty Little Liars, HBO content and exclusive shows and content — right into HBO Now. Then raising the price down the road.
Yet another streaming service from HBO feels clunky and unnecessary. Particularly with Netflix (NASDAQ:NFLX), Hulu, Disney’s (NYSE:DIS) coming offerings, Amazon’s Prime Video and others now available or coming soon. I think the Street would have cheered a stronger lineup of content for HBO Now and an eventual price hike to justify it, more than HBO Max. We’ll see how it pans out.
Trading T Stock
My issue with T stock now is how far it’s run. Granted, the stock came down on news of the company’s new streaming strategy. Should it continue to deteriorate, AT&T stock price could offer investors an attractive entry in the name.
Remember, AT&T stock hasn’t exactly been blowing it out of the water when it comes to earnings. Maybe that will be the case again this quarter and shares will fall.
In any regard, $35 is multi-year resistance, while a dip to $32 to $32.50 would be a great opportunity to get long.