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Bought AT&T [ClearOnMoney]
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Investment

Bought AT&T

12 Feb 2010 by Jim Fickett

Unlike much of the market, AT&T is not overpriced, and it is paying a 6.7% dividend.

At a high level, I continue to think

  • Equities are overpriced and could correct
  • In the next two to three years we are looking at slow growth and possibly deflation
  • Longer term, inflation is a danger

Given these assumptions, I remain interested in dividend-paying stocks with low volatility.

Today's choice is AT&T, into which I put 2% of the portfolio.

The best recent (January) summary I've seen of the case for utilities and telecoms generally is this from David Rosenberg at Gluskin Sheff (free registration required):

Utilities

  • The trailing P/E multiple is 12.8x or 35% below the market. Normally, utilities trade at a 23% discount.
  • The forward P/E is 11.8x, again a 23% discount to the S&P 550 multiple, and on this basis by far the cheapest sector.
  • EPS revisions for 2010 have been stable in the past three months.
  • The dividend yield at 4.1% is 220 basis points above the market – the long- turn average is 200 bps. …

Telecom Services

  • The trailing P/E multiple is 14.6x, 26% below the market multiple. Historically, this sector trades at a 14% discount.
  • On a forward earnings basis, the P/E is 14x for an 8% discount to the market.
  • The dividend yield, at 5.6%, is not only the highest among all the sectors by a mile, but is 240 basis points above the long-run average for the sector (and over 100 basis points better than what you get in this sector’s average corporate bond yield!). The yield in the telecom space is now 370 basis points higher than the overall market; historically the spread was closer to 150 bps.
  • The only 'negative' in this space right now is that EPS revisions for 2010 have come down nearly 7% in the past three months (but maybe this will put a low ‘bar’ to cross over).

For AT&T specifically, here are a few high points

  • Limited downside – long term floor of about $22, now about $25
  • Great dividend – 6.7%
  • Operating revenue estimated to grow +1.3% in 2010, despite loss of fixed lines and poor economy
  • Strong growth in smartphones – mainly iPhone, but not only
  • Beginning to address the well-known data network issues
  • Relatively low debt – Net debt & preferred / EBITDA = 1.6 (2010 estimate)
  • Debt-to-capital 39%, compared to sector avg 76%
  • Affordable debt – Interest coverage in 2009 was 6.2
  • Free cash flow 2009 $17bn, up 28% YOY
  • Dividend / Net income = 76.1% (2010 estimate; room to respond to any emergencies)
  • Trailing P/E 11.9 (compare Rosenberg comments)
  • In 2008 and 2008 there was net insider open-market buying of the stock
  • Solid value – price-to-book 1.5 (sector 2.2)

In other words, very little likelihood of spectacular growth, but quite safe value and a high dividend.