Dividend Aristocrats Part 51: AT&T Inc. (T)

Safety & Recession Performance

AT&T’s telecommunications business generates stable cash flows.

The company locks its customers into multi-year contracts that can have steep cancellation fees.

AT&T has customer churn of around just 1% a month. This means customers do not often switch from AT&T to rival competitors. Both cancellation fees and the similarity of competitor offers to AT&T help to discourage cancellations.

AT&T’s stable cash flows and long history of consecutive dividend increases make it very likely the company will continue to pay increasing dividends.

The company performs well during recessions. AT&T saw earnings-per-share dip slightly during the Great Recession of 2007 to 2009, but the effects were not too severe; the company remained profitable.

AT&T’s earnings-per-share through each year of the Great Recession are shown below:

– 2007 earnings-per-share of $2.76 (all time high)

– 2008 earnings-per-share of $2.16

– 2009 earnings-per-share of $2.12

AT&T has a large debt burden. The company has around $127 billion in debt on its books versus ~$5 billion in cash.

The company only increased its debt load with its string of recent acquisitions. Even with its higher debt burden, AT&T paid around $4 billion in interest in fiscal 2015 versus around $24 billion in operating income.

Investors should not be concerned about a liquidity crunch or insolvency with AT&T – despite its large debt load.

Valuation & Final Thoughts

AT&T Inc. (NYSE:T) currently trades for a price-to-earnings ratio of just 13.1 times 2015 adjusted earnings.  The S&P 500 currently trades for a price-to-earnings ratio of 20.9.

Historically, AT&T has traded at a discount of about 0.8x to the S&P 500’s price-to-earnings ratio.  This implies a fair price-to-earnings ratio of 16.7 for AT&T.

AT&T appears to be somewhat undervalued at current prices – especially considering how difficult it is to find safety AND high yields in today’s market environment.

AT&T is a compelling investment for investors seeking current income.

The company is ranked in the top 25% of stocks using The 8 Rules of Dividend Investing due to the stock’s high dividend yield and fairly low stock price standard deviation.

Disclosure: None