Finding a high dividend stock with good growth potential is a tall order. Aside from the fact that most companies do not offer dividends until they are relatively mature, low-interest rates have a tendency to increase share prices, thereby reducing dividend yields.
One company that has beaten the odds is AT&T (T).
However, there is more to a good investment than high dividend yield. In some cases, high dividends can be a trap that lures investors into buying a stock that will lose more than the dividend will pay.
In the case of AT&T, the one-year target price estimate is at $33.85. If the stock reached a consensus forecast, it would be less than a 5.5% return over the current share price. With its current dividend yield, you’d see almost a 12% return if the dividend remains unchanged and the analysts are right.
Let’s take a closer look at some of the pros and cons of investing in AT&T.
The company has been offering a dividend since 1984 and increased the amount of its dividend every year for the past 20 years.
Right now, AT&T’s dividend yield is at one of the highest levels it has ever been, which could suggest that the company is undervalued.
In addition, the company has plenty of free cash flow, so there is no reason to think that it would need to cut back on dividends going forward.
Then, there is the company’s valuation. AT&T is priced at just 8.85 times its future earnings. For the past five years that its forward PE has averaged 12.4.
In comparison, rival communications company Verizon (VZ) is priced with a dividend yield of just 4.12%. It has a one-year target estimate of $59.54.
That is a projected return of 1.3%. Sure, with the dividend yield, that brings it to 5.3% but that is less than half what you could get if AT&T follows through.
Verizon is also priced higher. Its forward PE is 12.26. Just looking at these numbers, it would suggest that AT&T is grossly undervalued.
The thing is that the numbers rarely lie. Investors are perpetually lined up to exploit even the smallest pricing error until the market corrects. When you see an opportunity like AT&T [NYSE: T], you have to wonder WHY the stock is priced so low.
One big issue facing AT&T is its acquisition of Time Warner.
By making that purchase, the company is effectively moving away from being a utility business, which it has been for decades, and getting into media.
Buying into AT&T now is a bet that the company is going to be able to make it work. You should know that the Time Warner deal adds up to roughly 37 percent of the value of AT&T’s stock. If it fails, the company is going to get absorbed by a competitor.
But let’s say that AT&T pulls through. After all, landlines are a virtual thing of the past and mobile phones are a mature industry.
Media is where “it is at” and Time Warner’s assets will give AT&T some powerful bargaining chips. This is why the federal government fought so hard to prevent the deal from going through.
“The entertainment assets are standout. They include marquee properties like the WB movie studios, HBO and Turner.
Consider that the annual media revenues are roughly $31 billion,” explains Investor Place. “AT&T’s massive mobile network should also provide nice distribution synergies. For example, the company has over 170 million D2C (direct-to-consumer) relationships.”
Then, there is streaming. Disney [NYSE: DIS] made news recently by launching its own streaming service. AT&T is expected to follow suit by the end of 2019.
According to Investor Place, its streaming service will be tiered so people can order exactly what they want.
There will be one offering for movies, one for original programming (like HBO), and the Warner film library, or at least that is the word on the street.
AT&T has the resources to put together something that truly stands out, but that doesn’t mean it will hit the mark. Lots of production companies, cable channels, and alliances have formed in this space and they each have not found the wide-reaching success that everyone imagined.
AT&T [NYSE: T] is a good company with a solid past, but it is changing everything about the way it does business right now. The high dividend yield could be enough of an incentive for you to ante up and open a position in the company, but be aware that you may not see those forecasted returns.
In fact, you may not see any in the short-term if AT&T falls short on any of its promises, be it a lackluster streaming service or operations that seem to lack a definitive plan.
Remember, the share price of the company reflects investor sentiment more than the actual value. If AT&T doesn’t give the people a reason to rally, the stock could sink.
Bottom line: AT&T is a solid dividend stock, but it won’t work for every investor. Be aware that its efforts could fail. Only take a leap if you are willing to bet that AT&T can see this through within your investment horizon.
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