Summary
- AT&T's dividend appears to be safe with a ~60% free cash flow payout ratio.
- AT&T is reducing its debt dramatically and expects to pay off another ~$20b in 2019.
- This will bring AT&T's debt ratio down to 2.5x by year's end.
- This company is very undervalued, at just 8.5x earnings (this price tag is lower than it traded at during the 08/09 trough).
- This idea was discussed in more depth with members of my private investing community, The Dividend Growth Club . Start your free trial today »
When it comes to high yield investing, I have three main priorities. The three things I look for seem fairly simple when you lay them out. However, truth be told, there aren’t many high yielders out there in the market place that meet these thresholds. This is the main reason why I don’t own many high yielders in my DGI portfolio. However, there is a stock with a big, juicy yield up near the top of my portfolio’s weighting rankings. It’s currently a top-5 position for me, at 3.9% of my portfolio. That company is AT&T (T) and in this article I will discuss why I’m so bullish.
So, what am I looking for in a high yield investment? First and foremost, I want to make sure that the yield is safe. What’s the point of a hefty dividend if it’s unreliable and is eventually cut? My second priority goes hand in hand with the first. Not only do I want to make sure that the dividend is safe, but I also want to make sure that the company’s balance sheet and operations are strong enough to generate growth that will allow the company to sustainably increase its dividend annually at a rate that exceeds inflation. What’s the point of having a high yield if the purchasing power it provides is eroded away over the long-term? And lastly, I want to make sure that I’m paying an attractive valuation. Most reliable high yielders are mature companies that don’t have great growth prospects and therefore, it doesn’t make sense to pay a huge premium for their shares because the likely growth will not justify it.
Using the three basic thresholds, let’s break down AT&T stock.
