My, how the tables have turned.
In the waning days of the dot.com bubble of the late 1990’s and early 2000’s tech stocks were considered way overpriced. Some had P/Es over 100 and drove the overall market to an incredibly high valuation.
Today a new group of stocks are considered by a number of analysts to be overpriced. Defensive and low-growth telecoms, utilities and consumer staples now have P/E’s topping the overall market, which is at about 18.4 today.
According to these analysts, a bubble is forming. Some call it the dividend bubble because many of the “at-risk” companies tend to issue a quarterly check to investors who flocked to them in the yield hungry world we are in right now.
Watch out when the bubble pops, they say.
The telecom giant AT&T Inc. (NYSE:T) has been on a roll lately and the stock has been bid up to around $37. The company has a P/E of 28.9, which is much higher than it 5-year average of 21.2 and the overall market.
The company is attractive to many investors, including me, because of its healthy $0.45 quarterly dividend, which AT&T Inc. (NYSE:T) has increased every year for the last 25. The yield of 4.9% handily beats just about any fixed income instrument around and the current inflation rate.
Still, the naysayers claim, based upon its recent lackluster earnings announcement AT&T Inc. (NYSE:T) is poised for a fall.
I say don’t be too fast on the trigger. With wireless data use exploding, an enviable retention rate of its smartphone customers, lots of cash flowing into its coffers and low volatility (the beta is 0.38), the company is probably a keeper. I would recommend holding the stock as part of the income producing portion of a portfolio.
A smooth shave
Consumer products heavyweight The Procter & Gamble Company (NYSE:PG) also posted less than spectacular results recently, and analysts jumped on the news as evidence that the company will not be able to keep justifying such a “high” stock valuation.
The current P/E is 19.4, so the stock does trade at a premium to its 5-year average of 17.8, to its sector, and to the overall market.
Like AT&T Inc. (NYSE:T), The Procter & Gamble Company (NYSE:PG) pays a nice dividend and yields 3.1%. It just announced a 8% bump in the payout. It has been increasing the dividend for the last 57 years.