This purchase of 155 additional $T shares brings my dividend income to $1,382.79 per year! Considering I started off my 2018 with $566 in annual dividend income, the $817/yr increase is site for sore eyes as I see the potential of where I am heading. I also have this position on DRIP, which means I am accumulating more shares each dividend date, which will continue to increase my overall dividends!
A Moment of Hesitation
I have to admit though; while I am fully satisfied with this purchase and future of AT&T as a company, I did have some hesitation in buying this stock.
There is much work AT&T will need to do to integrate its recent acquisitions into its business model and the future of media is anything but certain. But the financial analyst and value investor in me said this deal was too good to pass up.
It is no secret that $T has its doubters. Many people think this stock is doomed to fail the way of Kodak through services becoming obsolete or GE’s current downfall in not having a core focus. I can see arguments on both sides, so my job as a value investor was to form my own opinion. When I began to dig into AT&T, I liked what I saw:
- The debt/equity is favorable at 2.03x. It is yet to be seen how the final effect of the Time Warner acquisition will affect this debt picture but with low interest and hopefully some profit synergies, AT&T will have no trouble handling that additional debt.
- The Market Cap of AT&T is at $223.7B! This company is a behemoth! This can be good and bad but overall I see this as a good thing as the company has stable operating profits and cash flow so long as it continues to do what it does best and the market still values those services.
- The company’s cash flows from operations were $9B for the quarter ended 3/31/18. This was enough to cover the dividend payment of $3.1B. The company did eat into some of its cash position which is not good to see, but they did it primarily to purchase new PPE, which is needed in the communications industry.
- While $T’s legacy services (landline service) will eventually die out, I am impressed at how well the company is positioning itself in the wireless sector. I do not see the trend of instantaneous data connection going away any time soon, so I feel like $T will be positioned well into the future to service this market.
Since AT&T passed my initial why test, I now take it to the next level and ‘spread the numbers’.
The Numbers (aka ‘The Spread’)
I am going to go a little more in-depth on the spread than I usually do. This is mainly because out of all the stocks I own as a value investor, I consider $T to be the highest risk. There is a reason why I am getting a higher payout ratio for $T than for some of my other stocks that I own. Here is the RV Single Line Spread:
|RV Single Line Analysis|
|Prices As of||8/2/2018|
|High Level #s|
|Working Capital Ratio||1.11|
The Spread Takeaways
- Debt/equity is manageable at 2.03x. I do not want to see it much higher than this, however, so I will be watching this ratio very closely.
- Working capital is positive, which tells me the company has the ability to repay its current debts when they come due. I would like to see this higher than 1.11x and will be something I watch for in the coming years.
- The PE Ratio is manageable at 17.28x. I like to look for anything under 20. If it is over 20, it points to the idea that perhaps this company is overvalued.
$T Hit on 4 out of 5 points of my dividend checklist:
|x||Positive Cash Flow|
|x||Able to cover dividends through cash flow|
|x||Positive working capital past three years|
|Debt/Equity close to or under 1|
$T is not all rainbows and pixie dust. There are true concerns with the future of how AT&T scales. Here are some commonly asked questions:
- With ‘cord-cutting’ being the new norm, how will AT&T integrate its DirectTV and Time Warner acquistion into the new world of streaming and on-demand service?
- Will AT&T be able to service its debt adequately?
- Is AT&T too big for its own good? Is it adapting to changes in the marketplace quick enough?
I am confident going long $T at the moment. Will be watching this stock very closely for signs of growth and business strategy. And I believe the company’s saving grace will be in its wireless services. I am also confident that the company will figure out a viable, long-term strategy to make its acquisition of DirectTV and Time Warner play out well.
Until then, I will have AT&T on DRIP accumulating a bigger and bigger position!
Upward and Onward to #FinancialFreedom!
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