More Upside for AT&T Stock
AT&T Inc. (NYSE:T) stock is up an incredible 29.32% year-to-date, but it’s not exactly a name you would expect to post such stellar double-digit stock returns.
Many of us should be familiar with the name; after all, AT&T is the largest communications company in the world. In case you aren’t familiar with all of the company’s services, though, AT&T is a fully integrated solutions provider offering mobile services, high-speed Internet, video and audio entertainment, and smart solutions for personal and corporate clients.
I have always considered AT&T stock a low-volatility investment that pays a steady stream of dividends. Its business model generates free cash flow that is then returned to shareholders. These are not normally qualities found in companies that post double-digit returns.
So, what is driving the market today?
Low government yields are creating tailwinds that are propelling assets higher. AT&T stock is positioned to gain from these tailwinds. The following three reasons are why it will continue:
When companies grow to the size that AT&T has attained, they sometimes come across bumps in the road and find it difficult to grow. This has not been an issue for this company, as it has successfully integrated its growth strategy. In 2015, AT&T successfully completed its acquisition of DirecTV and Nextel Mexico. These acquisitions play well into the company’s ability to grow within the Latin American markets.
For 2Q2016, consolidated revenues came in at $40.5 billion, up 22.7% and driven partially by the DirecTV acquisition. Earnings per share were up 6.7% and even margins increased to a record high.
Management has a great track record of growing its top and bottom lines. The current market rewards growth and investors of AT&T stock are well positioned.
AT&T has a dividend policy of paying out approximately 70% of free cash flow. This policy has contributed to an impeccable record of raising dividends year-over-year for the last 30 years, resulting in a total dividend increase of 143%. AT&T stock currently yields a 4.48% dividend, or $1.92 per share.
In the current low-yield bond market environment, T stock’s dividend is very attractive. U.S. government 10-year bonds yield 1.568%. It is easy to see why 4.48% is attractive—it’s nearly three times as much. Plus, let’s not forget the preferential tax treatment of dividends over interest income.
If investors continue to reach for yield, we could see the price of AT&T stock appreciate, as investors bid up the price, reaching for yield. Given recent events, we can only assume the path of least resistance for yields is lower.
3. AT&T Stock Chart
T stock had been caught in a trading range for a little over three years. AT&T stock finally broke out of that range in February 2016. The breakout also coincided with a confirmed move above the stock’s horizontal resistance. That line in the sand stood for approximately 18 years and now marks support. Once shares were finally able to break free, the price ascent for T stock has been vertical.
Chart courtesy of www.StockCharts.com
The chart projects a price of $50.00. The current levels also mark all-time highs, thus no overhead resistance exists. The general trend for equities is higher, as global equity indexes are forging new all-time highs. The path of least resistance is up.
The Bottom Line on AT&T Stock
A company like AT&T stock offers investors an opportunity for value from its dividend and growth in share price appreciation. If the current global phenomenon of negative risk-free rates continues, investors will continue to reach for yield. Given AT&T’s tremendous track record of growth, we have numerous tailwinds that will drive share prices higher. AT&T shares are trading at all-time highs, but don’t let that sway you from taking a closer look.