It’s no coincidence that GEICO is one of the key pillars of Buffet’s dividend empire. Due to the nature of their business model, insurers tend to be boring yet predictable dividend payers. Which is one of the reasons I bought shares of The Travelers Companies last month.
Telecom companies are also sometimes characterized as being boring like bonds. Similarly, their large, monthly recurring subscriber revenues make for predictable dividend payouts.
Case in point: this month I bought shares in a company that has paid out rising dividends for 33 years. Now that’s the kind of boring yet predictable I can get behind!
On June 19 I bought 43 shares of AT&T (T) for a total of $1,668.
In this post I explain the reasons why I made this addition to my portfolio and what this means for my forward dividend income.
AT&T Inc. provides telecommunications and digital entertainment services. The company operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility, and International.
The Business Solutions segment offers wireless, fixed strategic, legacy voice and data, wireless equipment, and other services to business, governmental, and wholesale customers, as well as individual subscribers.
The Entertainment Group segment provides video entertainment and audio programming channels to approximately 25.3 million subscribers and broadband and Internet services to 12.9 million residential subscribers.
The Consumer Mobility segment offers wireless services to consumers, and wireless wholesale and resale subscribers, such as long-distance and roaming services.
The International segment offers digital television services, including local and international digital-quality video entertainment and audio programming under the DIRECTV and SKY brands throughout Latin America.
Breaking down AT&T’s four segments shows how the company is rapidly becoming less boring. It’s certainly no longer the copper wired lines company - with its origins back to Alexander Graham Bell’s Bell Telephone Company.
The 2015 takeover of DirecTV made AT&T the biggest pay TV company in the US. And with the pending acquisition of Time Warner AT&T is bolstering its original content - for instance with the recent Wonder Woman hit franchise.
The company is also expanding into areas such as the Connected Car, an Internet of Things play which is part of the Industries of the Future.
So while the prospects of AT&T look bright - what are its current dividend features ?
AT&T is a dividend champion with a very impressive 33 year streak of dividend increases. The current yield is 5.03% – much higher than the average 3.5% yield I strive for in building my portfolio.
The flip side of that high yield is that the payout ratio is at 96%, leaving not much room for (near) future dividend growth. The 5 year dividend growth is an almost negligible 2.18%.
Comparing AT&T’s Earnings per Share (EPS) in the last quarter versus the same quarter in the prior year shows a -8.20% decrease. Current year EPS versus last year equals a 2.22% increase.
Long term investors would need to wait for the strategic bets on DirecTV, Time Warner, the Connected Car etc. to pay off before increase earnings and dividend can get growing again. But for now the 5.04% dividend yield is a great booster to my forward dividend income.
The Price/Earnings (P/E) ratio is 19.07, below the 5 year average of 23.72, and well below the Insurance industry’s 5 year average of 28.36.
In their May 13 report CFRA marks AT&T as a 4 star buy with a 12 month target price of $45 - about 16% above my buying price.
Given the annual dividend of $1.96 per share this purchase increased my forward annual dividend income by $84.28.
What do you think about AT&T? Are you buying other dividend growth stocks? Leave a comment/reply to share your thoughts!