Dividend Aristocrats In Focus: AT&T Inc.

Up to date on April twenty ninth, 2021 by Bob Ciura

AT&T (T) is a widely-followed inventory amongst earnings traders, and for good motive. The inventory has a excessive dividend yield above 5%, and an extended historical past of regular annual will increase.

The corporate has elevated its dividend payout for 36 consecutive years, making it a member of the distinguished Dividend Aristocrats, a gaggle of S&P 500 shares with at the very least 25 consecutive years of dividend will increase.

Together with AT&T, there are at present 65 Dividend Aristocrats. You’ll be able to obtain an Excel spreadsheet of all 65 Dividend Aristocrats (with necessary metrics that matter) by clicking the hyperlink beneath:

AT&T is a powerful enterprise, with a management place throughout a number of areas of the telecommunications trade. Additionally it is constructing on a serious progress catalyst, the huge acquisition of Time Warner.

AT&T continues to rank extremely among the many a whole lot of shares in our protection universe, and in addition among the many Dividend Aristocrats. We imagine that the inventory stays a purchase for 2021 and past.

Enterprise Overview

AT&T traces its roots again to 1876 when Alexander Graham Bell invented the primary model of the phone. In its present type, AT&T is the results of a tangled internet of mergers and spinoffs which have taken place since 1984, when the previous AT&T spun off its native phone operations however retained its lengthy distance, R&D and manufacturing segments. SBC Communications was born from this and with it, the fashionable AT&T was as nicely.

SBC acquired a number of smaller telecommunications gamers, together with what was left of AT&T in 2005, creating the corporate we all know at this time. Since then, AT&T has diversified away from cellphone service with its DirecTV acquisition in 2015, and the 2018 acquisitions of AppNexus and Time Warner Inc.

Right now, AT&T is likely one of the largest communications firm on the planet, working in three enterprise models: AT&T Communications (offering cell, broadband and video to greater than 100 million U.S. shoppers and practically 3 million companies), WarnerMedia (together with Turner, HBO, Warner Bros. and Xandr) and AT&T Latin America (providing pay–TV and wi-fi service to 10 nations). The firm generated $172 billion in revenue in 2020.

AT&T’s market capitalization at this time is sort of $220 billion, making it a mega-cap inventory.

The corporate has generated regular earnings and powerful money stream for a few years, and due primarily to the Time Warner acquisition, has a optimistic progress outlook forward.

Development Prospects

On April 22nd, 2021 AT&T reported first quarter 2021 outcomes for the interval ending March 31st, 2021. For the quarter the corporate generated $43.9 billion in income, up 2.7% from $42.8 billion in Q1 2020. Increased mobility and WarnerMedia income extra than offset declines in home video, enterprise wireline, and in Latin America.

Reported web earnings equaled $7.5 billion or $1.04 per share. On an adjusted foundation, earnings–per–share equaled $0.86 in comparison with $0.84 within the 12 months in the past quarter.

Supply: Investor Presentation

AT&T additionally up to date its full 12 months 2021 outlook, persevering with to count on 1% income progress, adjusted earnings–per–share to be steady with 2020 and a dividend payout ratio within the excessive–50% vary

AT&T continues to pay down the big quantity of debt that was incurred from the Time Warner acquisition. The corporate ended 2020 with a web debt-to-EBITDA ratio of three.1x. This ratio fell to three.0x within the 2021 first quarter. AT&T maintains a goal leverage ratio of two.5x for 2024.

Aggressively paying down debt is very necessary for AT&T, as the corporate took on an enormous degree of debt to finance its large Time Warner acquisition, in addition to different bolt-on offers in recent times.

Supply: Investor Presentation

Thankfully, AT&T generates enormous money stream which can hold the general debt load manageable, as evidenced by the affordable leverage ratios the corporate has focused. In flip, we additionally count on the corporate to report regular progress going ahead, because it has performed for a few years. AT&T is a colossal enterprise, however it’s not a quick grower.

We predict that is key for AT&T’s profitability and progress transferring ahead, and the monetary outcomes during the last 12 months present not solely that AT&T’s give attention to prices is working, but additionally that its newer strains of enterprise are driving progress.

Aggressive Benefits & Recession Efficiency

AT&T has a aggressive benefit with its entrenched place in numerous necessary industries. AT&T can be a recession-resistant enterprise. As a telecom supplier, AT&T enjoys regular demand, as shoppers are extraordinarily reluctant to surrender their broadband and wi-fi service, even throughout recessions. We view AT&T as among the many most recession-resistant Dividend Aristocrats.

AT&T’s earnings-per-share throughout the Nice Recession are beneath:

• 2007 earnings-per-share: $2.76
• 2008 earnings-per-share: $2.16
• 2009 earnings-per-share: $2.12
• 2010 earnings-per-share: $2.29

AT&T did see its earnings decline throughout the Nice Recession, however at a modest charge. The corporate remained extremely worthwhile throughout the recession, which allowed it to proceed rising its dividend all through. And, AT&T ultimately eclipsed its pre-recession earnings degree by 2016.

The corporate additionally held up comparatively nicely in 2020. In a really difficult 12 months for the U.S. financial system, because of the coronavirus pandemic, AT&T remained worthwhile with robust money stream.

Valuation & Anticipated Returns

We proceed to count on very robust returns for AT&T within the coming years because of a wide range of components. AT&T is among the many most engaging Dividend Aristocrats proper now, significantly for earnings traders.

We count on ~3% annual earnings-per-share progress over the following 5 years. Modest income progress will enhance EPS, as will value reductions to drive margin enlargement. As well as, we count on income progress from WarnerMedia, in addition to stronger efficiency from wi-fi providers.

Further shareholder returns will accrue from the mix of the inventory’s excessive dividend yield and the change within the valuation a number of. The corporate’s annual dividend is now $2.08 per share, placing the present yield at 6.7%. That makes AT&T a premier earnings inventory. As well as, the payout ratio is lower than 70% of projected earnings for 2019, so we imagine AT&T’s dividend is sufficiently coated at the moment.

Lastly, we view the inventory as barely undervalued. We count on AT&T to generate adjusted earnings-per-share of $3.20 in 2021. Primarily based on this, shares are presently buying and selling at a price-to-earnings ratio (P/E) of 9.8. We view AT&T as undervalued, with a good worth P/E estimate of 11.0. Valuation enlargement might add 2.3% per 12 months to returns. Together with the 6.9% dividend yield and three% anticipated EPS progress, this suggests a % annual complete return.

This makes AT&T certainly one of our top-ranked Dividend Aristocrats, when it comes to complete anticipated five-year returns.

Last Ideas

AT&T is a high-quality enterprise. The corporate is steadily worthwhile, even throughout recessions. It additionally has a serious progress catalyst within the type of its Time Warner acquisition.

Debt stays a priority for traders, significantly in relation to AT&T’s dividend streak. The corporate has not declared a dividend enhance since December 2019. Due to this fact, it might want to announce a elevate in some unspecified time in the future within the subsequent 12 months to take care of its Dividend Aristocrats standing.

That mentioned, the corporate’s immense free money stream, in our view, diminishes the significance of this concern. Non-core asset gross sales will even help in deleveraging. As a result of anticipated earnings progress, the excessive dividend yield, and a low valuation, we imagine AT&T can present engaging complete returns to shareholders within the coming years. In consequence, AT&T inventory stays a purchase for earnings and worth traders.