As virus fears hit the stock market again, AT&T (T) is heading towards washout levels found at market lows in mid-March. The stock is now below $ 28 and offers an extremely high 7.5% dividend yield. My investment thesis has been less enthusiastic about the company recently, but the valuation is too appealing when the market turns extremely bearish on the stock amid a market sell-off.
Source de l’image: site Web AT&T
High historical yield
The COVID-19 shutdown has hit AT&T hard. The cable industry continues to suffer from cord cuts and wireless customers have been unable to pay. A second wave of the virus is just not as likely to hit the stock as hard, with live sports remaining active this time around and the most serious economic shutdowns averted.
The company has already suffered a free cash flow blow of at least $ 3 billion this year. AT&T has an updated FCF estimate for 2020 of just $ 25 billion with a payout ratio of 60%. In addition, the wireless and media giant aimed to increase the FCF to $ 31 billion by 2022.
Despite the success of the FCF, the dividend remains easily covered in this environment with ~ $ 15 billion in annual payments. The dividend yield remains at the highest level of the past decade, with previous highs hardly ever above 6.0% until the wireless giant shoulder the heavy debt of acquiring Time Warner.
At a yield of 7.5%, AT&T only needs to trade flat for investors to generate solid total returns going forward. The company seems to be taking the wisest steps here with Communications Verizon (VZ) buying Tracfone for up to $ 6.9 billion.
Due to Verizon trading near post-2000 highs near $ 60 here, the dividend spread with AT&T is the highest in history. AT&T is now offering a yield 3.25 percentage points higher than Verizon’s 4.2% dividend yield. Historically, the yield has been within 1 percentage point of each other, suggesting that AT&T would have to have a declining dividend yield of around 5.2% to stay in line with trades. from Verizon.
AT&T is in the process of repaying its debt while Verizon has just accepted a cash payment of $ 3.125 billion with a potential of an additional $ 650 million to top it up. The charts show a clear pattern of separation when AT&T took on debt in 2018 to acquire Time Warner.
The key to success is AT&T following through on the debt repayment plan while Verizon now closes deals requiring an increase in net debt. The market could clearly shift to AT&T this cycle with new leadership at HBO, if the company sticks to plans to avoid debt-fueled acquisitions.
Even depleted free cash flow levels still leave the wireless and media giant up to $ 10 billion in cash to pay off debt after paying the high dividend. AT&T is not in such a difficult position to justify the constant dips in inventory.
AT&T hit a low of $ 26.08 during the stock market crash in March and another descent to those levels would wipe out the stock completely again. The inevitable double bottom here is a definitive buy opportunity with the dividend yield hitting almost 8.0% at its low.
Down to $ 26, a shareholder only needs the stock to rise to $ 32 to generate an annual return of over 30%. You shouldn’t really expect AT&T to return to pre-virus highs around $ 38- $ 40, but the possibility still exists. More importantly, surges to these levels will generate the following strong annual total returns:
- 29,60 $ – 18%
- 32,20 $ – 28%
- 35,80 $ – 38%
Of course, any timeline of less than a year would not generate the full 8.0% dividend yield, but investors would see a substantial benefit with limited risk. With large-cap tech stocks still trading at extreme valuations, AT&T at just 9x futures EPS estimates offers considerable value.
To take away
The main takeaway for investors is that AT&T is clearly hitting very cheap levels in any other washout of almost $ 2 off here. The stock is already offering a historic spread with the Verizon dividend and the recent deal could push investors back into AT&T. When the stock drops to $ 26, investors should aim for a 30% low-risk return from the wireless and media giant.
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Disclosure: I / we have no positions in the mentioned stocks, and I do not intend to initiate any positions within the next 72 hours. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
Additional Disclosure: The information contained in this document is for informational purposes only. Nothing in this article should be construed as a solicitation to buy or sell securities. Before buying or selling stocks, you should do your own research and come to your own conclusions or consult a financial advisor. Investing understands risk, including loss of capital.