When it comes to income investing, the title of “Dividend Aristocrat” is a big deal. The name officially refers to members of the S&P 500 Index ($SPX) that have raised their dividends for 25 consecutive years or more, and on Wall Street, it's shorthand for the most elite group of reliable income stocks.
While Dow stock Walgreens Boots Alliance (WBA) is getting a lot of attention today for officially ending its run as a Dividend Aristocrat - a capital-preserving move that was widely anticipated by many - it's hardly the first blue chip to drop out of the club in recent years. Previously, telecom giant AT&T (T) was a longtime fixture of the group, boasting over 35+ years of consecutive dividend growth before ending its run in 2021.
Losing that elite Dividend Aristocrat title was a big blow to AT&T's rep, for sure. But does this mean the telecom is now a bad choice for income investors? Absolutely not. In fact, AT&T is still serving up one of the safest and most attractive dividends out there, backed by a strong free cash flow - and a low valuation that's hard to ignore.
So, if you're searching for yield in this market, here's why AT&T might be a prime addition to your portfolio right now.
AT&T's Dividend History
Legacy telecom stocks are known for their dividends, and AT&T is no exception - for 36 straight years, the company upped its dividend, earning it a spot among the Dividend Aristocrats. The average annual dividend growth rate over the decade ended in 2020 was a modest but steady 2.16%.
But AT&T left its dividend unchanged in 2021, officially losing its Aristocrat status in the process. Then, the telecom cut its shareholder payout nearly in half in early 2022 as the company spun off its WarnerMedia assets into Discovery (WBD), with CEO John Stankey stating at the time, “I’d much rather be pouring some of that cash back into the infrastructure of this business to [generate] returns at a higher level than what we pay out on the dividend."
The dividend cut triggered shockwaves at the time, but here's the kicker - AT&T's dividend is not only still very attractive, it's also remarkably safe and sustainable at current levels, according to MarketWatch data.
Is AT&T a Quality Dividend Stock?
AT&T currently offers shareholders a quarterly dividend of $0.28, which translates to a forward yield of 6.44% - roughly double the telecom sector median. Among its main rivals, only Verizon (VZ) offers a slightly higher yield at 6.79%, while T-Mobile (TMUS) is a newcomer to the dividend game, and yields less than 0.5%.
Free cash flow per share at AT&T is expected to hit $3.23 in 2024, more than covering the annualized dividend of $1.11 per share. The payout ratio, or the percentage of earnings paid out as dividends, is expected to be 40% in 2024. That's lower than its historical average of around 60%, and pretty reasonable for a mature company like AT&T.
AT&T's business model is also recession-resistant, providing stability and predictability to its earnings. As the largest telecom company in the U.S., AT&T has a massive and loyal customer base, including a market-leading 46.9% share of wireless subscribers domestically.
So while the loss of “Dividend Aristocrat” bragging rights was a short-term blow, AT&T still offers income investors a top-shelf yield backed by an ultra-safe payout.
AT&T Shares Are Reasonably Priced
AT&T's stock performance hasn't exactly been a thrill ride over the past year. The shares are down more than 9% in the past 52 weeks, compared to a gain of over 21% for the broader S&P 500.
But here's the silver lining: AT&T's stock is now looking like a bargain. For starters, the stock's price-to-cash flow (P/CF) ratio is 3.19, which is well below the sector median of nearly 10x forward cash flow. Plus, AT&T's forward price-to-earnings (P/E) ratio is 7.07, which compares favorably to the sector median of 15.81, and the shares are priced at a reasonable 1.01x forward sales.
These metrics stack up well not only against T's telecom peers, but also against the stock's own 5-year historical averages - suggesting it's attractively priced at current levels. So not only does Ma Bell offer a mouthwatering nearly 7% dividend yield, but the stock itself looks cheap these days, too.
What's the Analyst Forecast for AT&T Stock?
Even more encouraging, Wall Street analysts think AT&T has room to rise over the next 12 months. The stock's mean price target is $21.27, which suggests there's a solid 23% upside potential from its current price.
Out of 19 analysts covering the stock, 8 are shouting "strong buy," 2 are saying "moderate buy," and 9 are recommending a "hold," for a consensus rating of “moderate buy.”
AT&T's stock might not be the flashiest pick out there, but this telecom still has a lot going for it. While it's no longer a Dividend Aristocrat, the company's high yield - backed by strong free cash flow and a reasonable payout ratio - sets it apart. Plus, the stock currently sports an appealing valuation, making now an opportune time to scoop up shares ahead of this year's expected capital appreciation.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
