To kick-off our weekly series on some of the best dividend paying stocks in the country, we thought we’d start with a household name that’s been paying incredible dividends and part of a straightforward industry.
Listed on the NYSE with ticker T, AT&T is probably one of the oldest multinational firms in the world. The company’s telecommunication roots can be traced all he back to 1876, when Alexander Graham Bell invented the telephone. Bell set up the American Telephone and Telegraph (AT&T) company as a subsidiary of his flagship Bell Company. A little legal wrangling in 1899 led AT&T to take over Bell Co., and be established as the parent company. Over the next few years the company expanded across North America. It had a government-approved monopoly on phone services throughout the region. It firmly held onto its monopoly in North America and position as the world’s largest telephone company for most of the twentieth century.
Today, AT&T is worth over $254.65 billion. The company brings in $163.8 billion in revenue and employs nearly 273,000 people across the world. The company recently purchased Time Warner for $85.4 billion. The combined entity will earn enough of revenue to contribute nearly 1% of US GDP. It’s a mega-deal of epic proportions.
But AT&T has the cash to spend and for most of its history the cash has been returned to shareholders in the form of dividends. The company currently pays nearly $2 per share in dividends. That’s an impressive dividend yield of 4.96%. Furthermore, it has managed to increase dividends every year for the past 37 years. That puts it firmly in the Dividend Aristocrats Index we discussed last week.
AT&T is the leader in a cash-rich industry. Other companies like Verizon, Vodafone, and T-Mobile also have tremendous cash hoards that allow them to pay a hefty dividend to long-term shareholders.
The company has nearly $5.78 billion in cash on its book.The company has a relatively high payout ratio at nearly 90%, which means it pays almost all of its earnings out as dividend. However, free cash flows per share more than cover the rate of dividend which would probably suggest the dividend is safe for now.
While AT&T has the financial strength to keep paying dividends at this level, it probably doesn’t have much room for growth. The industry isn’t a growth-sector by any means and the high payout ratio would suggest that T has little wriggle room to expand the amount of cash it pays to investors.
The telecoms sector in the United States currently grows 2% annually. Over time this growth rate will slow even further and that means mega corporations like AT&T will have to diversify, innovate, or consolidate to keep expanding. The recent purchase of Time Warner is a clear sign that AT&T has picked an acquisition-based strategy to keep growing and to fight off intense competition.
Since AT&T is one of the largest companies in the country, operates in a mature industry with low growth potential, and pays out most its income in dividends, the dividend discount method is appropriate for valuation.
Over the past twelve months the company has paid $1.92 in dividends. Dividends are expected to grow the same rate as the telecoms industry – 2%, while the discount rate for AT&T is 7%. Based on the gordon growth model:
AT&T’s intrinsic value = Dividend / (Discount rate – Growth rate)
= $1.96 / (7%-2%)
AT&T’s market price on the 20th of Feb, 2017, was $41.48. Which means the company is currently 6% overvalued. That’s not a high premium, to be fair. AT&T would be a modest buy at current prices if you’re looking to tap into a high-yield stock with stable earnings for the long term. The stock price is at fair value.
AT&T is a massive telecommunications giant with a long history of growing dividends. It pays out most of its earnings in dividends and is currently trying to buy its way to growth. The current market price is a reasonable rate for the company, if you’re looking for a great dividend aristocrat to add to your income-focused portfolio.