Should Dividend Investors Reconsider AT&T?

We are now well beyond the halfway point in 2010 and yet the major stock indices are still basically where they were to start the year. The Dow Jones index has gained less than 1% since the year began, but two surprising stocks have been thriving this summer. Verizon shares have gained nearly 8% since the end of June, while AT&T’s stock price has soared nearly 12%. This summer rally has enabled the two telecom giants to pare their losses for the year.

 

Earlier this year, we speculated that AT&T and Verizon were not the best dividend stocks in the Dow. However, the recent strong performance in both stocks should cause dividend investors to reconsider these high yielders.

 

Last month, we highlighted 5 reasons to buy Verizon stock and this month eDividendStocks.com interviewed AT&T Senior Vice President of Investor Relations, Brooks McCorcle, about why dividend investors should reconsider AT&T.

 

It is natural for investors to compare AT&T to Verizon which offers similar growth prospects, but a higher dividend. What factor(s) should compel investors looking for a strong dividend stock to choose AT&T over Verizon?

 

We do have a strong dividend, which reflects our strong cash flows and our history of returning value to shareowners. In fact, AT&T’s dividend is one of the strongest among S&P companies, currently yielding 6.2%, and we have a record of increasing our quarterly dividend payout every year for 26 consecutive years.

 

In order to support and grow the dividend, the underlying fundamentals of the business must be strong. AT&T has terrific operational assets focused on some of the best growth areas in the communications industry – areas like wireless, video and advanced business services – plus we have a strong record of executing well and delivering solid results. For the first half of 2010, for example, we grew total consolidated revenues, expanded margins, and increased earnings per share at a solid double-digit pace, excluding one-time items.

 

Wireless is an important growth driver for our business – it now represents better than a $50 billion dollar annual revenue stream – and it has performed at a high level. In the second quarter, we grew wireless service revenues at a double digit pace, nearly double the rate of our nearest peer, and wireless operating income grew nearly three times our nearest peer. And, given that we own 100 percent of our wireless business, unlike Verizon, all of the income and cash flow go to AT&T’s shareholders.

 

We also continue to perform well on the wireline side of our business, where our operating margins were more than 12 percent in the second quarter, which is 1,000 basis points higher than Verizon.

 

That’s a great point, as Verizon Wireless is a joint venture with Vodafone. Verizon has been using the cash from their Wireless division to pay down debt and reinvest in the business rather than returning that cash to investors in the form of a dividend.

 

AT&T has only given marginal annual dividend increases of $.04 per share each of the last 2 years – should investors expect larger increases in the future as economic conditions improve?

 

Our board makes decisions about the dividend, typically toward the end of the year. I would reiterate that we have increased the quarterly dividend for 26 consecutive years. This is unmatched in the industry. And, as I mentioned before, AT&T’s dividend yield is currently one of the top in the S&P. Also, when you look at total return to shareholders (stock price appreciation plus dividends paid) over the long-term, AT&T has performed very well, returning more than 40 percent over the past 5 years, which is better than the S&P and most of our peers. The strength and consistency of these returns comes largely from our dividend.

 

What are the key metrics that investors should use to evaluate AT&T?

 

1. Earnings and cash flow growth

2. Return on invested capital

3. Total returns to shareholders (share price increase and dividend return)

 

In part 2 of this interview, we will look at some of the growth catalysts for AT&T and the potential impact of losing their exclusivity agreement to sell the Apple iPhone.

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