AT&T Inc. (NYSE:T) has played a pivotal role as an early addition to the Dow Jones Industrials . But the company has transformed itself over the decades, overcoming the breakup of its landline monopoly in the 1970s to return as a wireless network powerhouse. What’s next for the telecom giant? Let’s revisit how AT&T does on our 10-point scale.
The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.
Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.
When scrutinizing a stock, retirees should look for:
- Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts’ growth potential, but they do offer greater security.
- Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won’t make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock’s share price.
- Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won’t fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
- Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
- Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time — as long as it doesn’t jeopardize the company’s financial health.
With those factors in mind, let’s take a closer look at AT&T.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $197 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 4 years | Pass |
| Free cash flow growth > 0% in at least four of past five years | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 0.54 | Pass |
| Worst loss in past five years no greater than 20% | (28.1%) | Fail | |
| Valuation | Normalized P/E < 18 | 32.94 | Fail |
| Dividends | Current yield > 2% | 5.1% | Pass |
| 5-year dividend growth > 10% | 3.8% | Fail | |
| Streak of dividend increases >= 10 years | 29 years | Pass | |
| Payout ratio < 75% | 141% | Fail | |
| Total score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at AT&T last year, the company hasn’t been able to earn back the 2 points it lost from 2011 to 2012. Yet the stock has done well, gaining almost 20% over the past year and continuing to support its high dividend yield.
AT&T has made major shifts in its changing emphasis from landlines to its wireless network over the past decade, but its core business model remains the same. By getting recurring revenue from largely captive customers, AT&T and rival Verizon Communications Inc. (NYSE:VZ) justify their colossal capital expenditures on building out their respective networks. As a result, AT&T has more than enough cash flow not just to finance its debt but also to give shareholders impressive amounts of dividend income.
Yet the rise of smartphones has put AT&T in a bit of an earnings bind, as subsidies to smartphone makers sap immediate earnings upon their initial purchase. Although AT&T makes back those subsidies over the course of two-year contracts, the relative lack of competing networks makes locking customers in less valuable than it would be in a more competitive data-plan environment.
AT&T has historically stayed within U.S. borders, but the company may be looking to expand into Europe. Looking for growth is a reasonable strategy, but Europe seems like a tough place to do business. Competitive pressures from France Telecom SA (ADR) (NYSE:FTE) and Vodafone Group Plc (ADR) (NASDAQ:VOD) would make entering the market extremely challenging, and the fact that Europe is in recession by some measures has led some analysts to question the move.
For retirees and other conservative investors, AT&T is a safe dividend-rich pick. Focusing too much on P/E-based valuation will lead you to incorrect conclusions because of the accounting of its big network investments. With a combination of income and growth potential, AT&T deserves a close look from anyone looking to add telecom exposure to a retirement portfolio.
The article Will AT&T Help You Retire Rich? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends France Telecom and Vodafone and owns shares of France Telecom.
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