I don’t believe there is a single best way to think about AT&T. Furthermore, I think it’s worth the time to review several rational approaches.
Before I dive in, please be careful to note that I have been long on AT&T since April 11, 2015. Therefore, I am biased but now you know that right upfront.
I’ll start things off with my own highly biased point of view.
1. The Dividend Growth Investor
I remember getting into AT&T more than five years ago because I wanted to put money into a Dividend Champion. Here’s some quick background:
Dividend Champions are companies that have increased their dividend every year for the past 25 years. Contenders have increased their dividend for the past 10 years, and Challengers the past five years. For the dividend investor this is an essential source of information. The spreadsheet, created in 2008 by Dave Fish (deceased in 2018), is updated by Justin Law every month.
AT&T was paying a big dividend then and a there’s a big dividend now. As I write this, it’s paying well over 7% in a low interest and low yield world. It’s very likely you already know all about AT&T’s dividend, including the paltry dividend increases each year. One penny increases per year, over and over. That’s annoying but it roughly keeps up with inflation.
Two more quick things. First, compared to bonds, AT&T is kicking butt with yield. If you’re comfortable with their heavy debt load (S&P Credit Rating: BBB), then you probably sleep well enough. And secondly, you probably don’t care too much about AT&T’s price action. Maybe you’re collecting the cash, maybe you’re dripping, maybe you’re redeploying the cash flowing into something else entirely.
In summary, you’ve roughly bought a bond proxy and you’re comfortable taking on some extra risk with the debt load. You might be a bit older, and income is your friend, like old slippers or maybe your dog. And, “Get Off My Lawn!” – You easily deflect the insults of younger investors, since growth isn’t as important as stability. Maybe you’re a conservative investor.
2. The Value Investor
So, I’m making fun of myself a bit since I am very much a Dividend Growth Investor and I tend to go shopping on the Dividend Champion’s list. But, like most folks, perhaps you, I also like to get a bargain. I trust in the methods, thinking and philosophy of Warren Buffett, but also Charlie Munger.
Because of this Blue Light Special mentality, I like paying $0.50 to get $1 value when I can. Discounts are beautiful, even without a pint of beer. That’s why it’s easy to see something special with AT&T right here:
The blended P/E is about 9 right now. That’s well below its historical rate of 14, so valuation is quite good right now. The earnings yield is over 11%. And yes, earnings are taking a hit but it’s slow and steady as she goes.
I also should mention that Dividend Growth Investors and Value Investors like to know that the dividend is very well covered. From 2001 to 2019, the coverage ratio ranged from 44% to 96%. The average is right around 65%, according to my eyeballs and quick back of the napkin check.
For what it’s worth, even if AT&T treads water with a P/E around 9 until 2023, you’ll still enjoy an annual rate of return of around 8%. Of course, that’s due to the dividend, and that’s also something of an insurance policy that Value Investors like to see. This is also why Dividend Growth Investors are often very much in alignment with Value Investors. In fact, rumor has it that some people are both Dividend Growth Investors and Value Investors. Imagine that.
In summary, there have been multiple times where AT&T has been attractive to Value investors. Since 2017 there have been many opportunities to get a historical, value-based bargain. Things were a bit “hot” in 2015 and 2016, and also 2012 and 2013, but there were opportunities. Of course, 2008 and 2009 were also good times to dive in and grab some value.
I also need to point out here that many Value Investors will hold for years, even decades. Other Value Investors will trade, in and out, as it suits them. There have been many times to get in and get out for large profits in a short time. For example, you could have bought in late 2018 for about $28 or $29, then you could have sold for close to $38 or even $39 in late 2019. Doing that, my friend, would have generated over 44% in capital gains for you.
The proof is in the pudding. And there have been many times where AT&T could have handsomely reward Value Investors. And, that’s a perfect segue.
3. The Buy and Hold Investor
As the name implies, this kind of investor in AT&T is simply going to buy the stock and hold on. The #1 example on Seeking Alpha is Buyandhold 2012. His profile page is very clear:
I have never sold a single share of stock except on the rare occasion when one of my stocks was bought out for cash and I was forced to sell.. I keep all of my stock certificates or direct registration statements in a safe deposit box at the bank.
There you have it. Very importantly, many Buy and Hold Investors are also Dividend Growth Investors and Value Investors. These folks tend to get along at cocktail parties.
So, here’s where I think things get interesting. Many AT&T antagonists say it is “dead money” and they show a chart like this:
But, for a moment, just imagine only buying at times when AT&T is trading below the 1-year, 3-year, 5-year, 10-year averages. For example, if you started buying AT&T around $28 to $29 in late 2018 you might feel stupid right now. We’re near the end of 2020 and AT&T is stuck at the same price. You might feel like a clown. However, because you didn’t sell, your total annual rate of return would still be over 7% due to the dividend.
A key point is that many Buy and Hold Investors are very aware of dividends, growth rates, credit ratings and the like. In the case of AT&T, a Buy and Hold Investor is very likely not banking on wild growth. These types of investors sleep well because of the dividend track record. Also, “Buy and Hold” doesn’t mean “Always Buy High and Then Cry in Your Beer” – price matters and good timing helps. In fact, Buyandhold 2012 uses these six criteria:
1) A trailing and forward P/E ratio no higher than 20.
2) A 5 year expected PEG ratio no higher than 2.00.
3) A Beta no higher than 1.50, preferably 1.00 or lower.
4) A stock that has outperformed SPY for at least the last 10 years, the longer the better.
5) A stock that has raised its dividend every single year for at least the last 10 years, the longer the better.
6) A stock with earnings that at least double every 7 years, preferably every 5 years.
Note: He regularly adds new blog updates and frequently comments on articles published on Seeking Alpha. Again, he’s the near-perfect definition of an intelligent and educated Buy and Hold Investor.
4. Growth Investors
The story here is simple. If you’ve been looking for growth with AT&T you’re not getting it. There’s very little that makes me think it’ll become a growth stock. Sure, we can talk all day about HBO or 5G or anything else you want. But, again and again AT&T has shown it’s not a reliable growth play and even destroys growth. I hardly even want to talk about this. So, here it is from the mouths of others:
I could literally make a list of well over 100 articles about AT&T’s failures, especially on the topic of growth. If you care about growth, you’re just not going to get it with AT&T, unless you count the reliable, steady growth in cash flow over the years:
I went back pretty far. Yes, I know that AT&T has slowly evolved over the years. It’s not the same company as it was. However, generally speaking, AT&T keeps pumping out more and more “bottom line cash” over the years. That fuels the slowly growing dividends.
Those investors inclined to punch AT&T are usually looking for more robust growth. Sadly, it doesn’t seem that strong growth is in AT&T’s DNA. The only growth you’re likely to get – just playing the odds – is cash flow and dividends. Capital gains aren’t off the table but you have to play games, getting in and out at the right time.
Taken as a whole, I think this explains most of the religious debates about AT&T. It often comes down to personality, time horizon, and general investment philosophy. AT&T “works” well for many types of conservative investors and it “fails” for most growth investors. This is perfectly understandable. And, I feel that throwing grenades at each other can be quite healthy as long as we’re all civil. There’s always something to learn from those who hold different beliefs. I think this is especially true when those investors violently disagree and come armed with compelling data.
I’ll end by saying that I think for most investors, AT&T is trading below fair value by 5-10% and perhaps as much as 15-20%. A price under $30 is quite acceptable. It’s not a screaming, hair on fire deal, but the price is excellent for the value if you’re looking for a relatively safe, well-covered dividend.
If you invest in AT&T, please just don’t expect any sudden price explosion upwards. You are likely to end up naked and afraid, or at least grumpy. I say it’s better to buy AT&T for the healthy dividends. If capital gains are on the table, enjoy the sugar rush. Don’t blink. Someone might take the cake away.
Disclosure: I am/we are long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.