The Dividend Aristocrats are a select group of currently 57 S&P 500 stocks with 25+ years of consecutive dividend increases. These 57 are large, US companies that have historically provided (slightly) better performance and (slightly) lower volatility than the S&P 500 as a whole.
S&P 500 applies the following criteria to construct the Dividend Aristocrats list:
- must be members of the S&P 500
- must have increased dividends every year for at least 25 consecutive years
- Market Cap at least USD 3 billion
- Liquidity at least USD 5 million (average daily value traded)
- Diversification, at least 40 constituents and no sector allocation above 30%
Read more about the dividend aristocrats’ performance or check-out the European dividend aristocrats.
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This “in focus article” will discuss several aspects of the dividend aristocrat AT&T (T) and why the stock could be attractive for income/dividend investors based on our Dividend Score. Our Dividend Score System takes into account several fundamental and technical metrics that affect a company’s ability to continue paying dividends and its overall return. AT&T recently announces its 36th consecutive dividend increase and increases its quarterly dividend by 2%. AT&T is a dividend aristocrat with a low dividend growth rate, and one of the highest dividend yield. The overall dividend score is 64 (out of 100) which is still safe. AT&T also provided an essential three-year capital allocation framework for its business, including paying down debt, which is essential for a sound business.
AT&T (T) overview
|Dividend||Dividend Yield||DGR 3 years|
Data: December 9th, 2019
Business model and growth perspective
AT&T, founded in 1983, is the largest communications company in the world, operating in four distinct business units:
- Communications (77% of revenue): provides wireless and wireline (phone and internet) services to more than 100 million U.S. consumers and more than 3 million businesses.
- WarnerMedia (18%): consists of all Time Warner assets, including Turner Cable TV channels, HBO, and Warner Brothers studios. AT&T acquired Time Warner for $85 billion in June 2018.
- Latin America (4%): offers mobile services and satellite TV subscriptions throughout Latin America.
- Xandr (1%): AT&T’s new data analytics and advertising business.
Debt reduction is and should be a priority for AT&T over the next three years. AT&T’s management expects leverage (net-debt-to-EBITDA ratio) to fall to around 2.5 times by year-end 2019 (down from 2.8 in 2018), with a goal of hitting 2.0 to 2.25 times by the end of 2022. Given AT&T’s excellent free cash flow this should be achievable.
Source: AT&T Q3-earnings
For 2020 AT&T expects revenue growth of 1% to 2%, adjusted earnings-per-share of $3.60 to $3.70 and a dividend payout ratio in the low-50% range.
By 2022, AT&T expects 1% to 2% revenue growth, $4.50 to $4.80 in earnings-per-share (representing roughly 10% annual growth), continued dividend increases making up less than 50% of free cash flow.
Dividend history and dividend growth
It is important that companies that can maintain or even increase their dividend payments in bad times. This is an indication that the company has a strong market position in a stable business that performs well throughout the economic cycle.
AT&T does have a strong market position (wide-moat) and however, it is a “slow-growing” dividend aristocrats, given the dividend growth rate of approximately 2% per year. As dividend aristocrat, AT&T has raised its dividend already for 36 consecutive years.
In December, AT&T announced another dividend increase. AT&T’s quarterly dividend will increase from $0.51 per share to $0.52 per share. The dividend is payable on Feb. 3, 2020, to stockholders of record at the close of business on Jan. 10, 2020. On an annualized basis, this equates to a full-year dividend of $2.08, up from $2.04.
AT&T’s current dividend yield of 5.33% is -3% below its 5-year average. The 5-year average dividend yield is 5.50% (see red-line in the chart). This indicates the stock looks reasonably valued today.
The payout ratio is less than 60% of earnings for 2019 so in the safe-zone. Historically, the company had an average dividend payout ratio of 71% in the last ten years. AT&T’s ambition is a dividend payout ratio in the low-50% range (2022). To conclude, AT&T has a secure dividend payout with room for annual increases in the low single-digit range.
Stable cash flow
Without stable cash flow, it is almost impossible to maintain the dividend in times of a downturn. Operating free cash flow and free cash flow are 2 important metrics for a dividend stock. AT&T has generated positive free cash flow in each of the last 10 years, which is a sign that AT&T’s business has consistently earned enough cash to cover its spending needs, giving more flexibility to maintain its dividend over time.
Low debt ratio
Companies with a low debt ratio have the option of maintaining or even increasing the dividend even during recessions. The (net) debt-to-EBITDA ratio is a great metric to include. AT&T’s net debt-to-EBITDA ratio, is high with a level of 2.8 (the lower, the better). Net debt/EBITDA ratio values below 3.0 are even still acceptable.
Debt reduction is and should be a priority for AT&T over the next three years. AT&T’s management expects leverage (net-debt-to-EBITDA ratio) to fall to around 2.5 times by year-end 2019, with a goal of hitting 2.0 to 2.25 times by the end of 2022. Given AT&T’s excellent free cash flow this should be achievable. AT&T is reducing a dividend investor risk here.
AT&T’s forward P/E ratio of 10.6 is well below its 5-year average of 12.4 and the Communications sector average of 21.6. Based on our fair value estimate of 12, we view this stock as undervalued right now and with upside potential.
AT&T’s earnings-per-share performance during the Recession period (2007-2009) can be seen below:
- 2007 adjusted earnings-per-share of $2.76
- 2008 adjusted earnings-per-share of $2.16 (22% decline)
- 2009 adjusted earnings-per-share of $2.12 (1.8% decline)
- 2010 adjusted earnings-per-share of $2.29 (8% increase)
The share price of AT&T declined from $42.83 to a low of $21.72 during the 2007-2009 financial crisis. The drop of 49% is an “average” performance during the recession among the dividend aristocrats. See the stock price chart below:
The stock has surged 35% year-to-date, outperforming the S&P 500 Index so far this year. The 10-year geometric annual performance is very poor 3% annually and clearly visible in the performance triangle. Looking at the win-ratio of 42% and a loss ratio of 2.6, those two ratios are average for this stock. The overall price-performance of AT&T is very poor, combined with the dividend, the total return is ~145% over the last 10 years. Which is way below the 256% performance of the S&P 500 Index.
AT&T’s performance triangle.
AT&T is a true dividend aristocrat with 36 consecutive years of dividend increases. The reasonable secure dividend payout, below 55%, leaves room for future annual increases in the low single-digit range. For the coming 5 years, we see a total annual return in excess of around 10%, consisting of the 5.4% dividend yield, 4% expected EPS growth. This excludes a potential positive impact from changes in the stock valuation, which could happen when AT&T returns to its 5-year average P/E ratio of 12.4.
Dividend investors considering AT&T must be aware and accept the risks that come with current debt levels and the successful execution of the deleveraging plan presented by the management. In return, the dividend investors receive a high dividend yield above 5% and a positive EPS growth. AT&T is a buy for income or retirement investors. Dividend growth investors should avoid this stock, given the slow dividend growth pace of only 2%.
Other Sources of Dividend Investment Ideas
The Dividend Aristocrats list is not the only way to quickly screen for businesses that regularly pay rising dividends.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of less than 20 businesses with 50+ years of consecutive dividend increases.
- The MoneyInvestExpert Defensive Aristocrats is a performance-based top-10 selection of the Dividend Aristocrats to outperform the market on the long-term.
- Portfolio lists like the Berkshire Hathaway Portfolio or Bill Gates’stock portfolio can be a source.
- For the European focused investors there is also the list of European Dividend Aristocrats.
- Dividend Champions are not necessarily members of the S&P 500 index, have increased their dividend for 25 or more consecutive years.
- 100+ years of dividend, the list of stocks that pay over 100 year of dividend can be an list of inspiration.
Next to selecting the right dividend stocks, important principles for successful long-term investing are Disciple, Diversification, Defensive & indeed Dividend. Read more about this in our free e-book.
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