Just last week, I published an article on AT&T Inc. (NYSE:T) explaining why AT&T stock is nothing more than a dividend play.
It’s a low-growth story that will have the same headwinds (cord-cutting) and tailwinds (wireless build-out) in five years as it does today. Those headwinds and tailwinds will offset one another, and growth will be muted in a long-term picture.
Meanwhile, the stock isn’t all that risky at just 7-times trailing EBITDA. Plus, there is the big dividend which adds significant downside protection.
This low-multiple, low-growth, high-dividend profile is perfect for income oriented investors seeking limited volatility but not yearning for out-sized returns. But A&T stock isn’t something you own for the long-term if you’re looking for big returns.
Just because AT&T stock won’t generate serious alpha in the long-term, though, doesn’t mean this stock is dividend dead-weight. In fact, AT&T stock does offer an interesting value proposition for short-term oriented traders.
The stock is highly cyclical against a fundamental growth story that isn’t very dynamic. Consequently, it’s fairly reasonable to say the trading patterns which have emerged over the past five years will persist over the next five years.
That is a short-term trader’s dream. So while AT&T stock may not be a long-term investment opportunity for traders wanting to generate alpha, it may be a good stock to buy on certain dips and sell on certain rallies.
AT&T’s Trading Pattern
Over the past five years, the right time to buy T stock is when the dividend yield is above 5%. That is when the stock has bottomed and downside risk is greatly limited.
For example, the dividend yield was largely above 5% for most of 2014 and 2015 when AT&T stock hugged the $35 level. AT&T stock then ran up in 2016 to $43. The dividend yield fell all the way to 4.4%. That was a peak. The stock pulled back until the dividend yield was about 5% in October 2016, and then rebounded sharply. Consequently, the dividend yield fell back to around 4.4%, once again representing a peak in the stock. AT&T stock again pulled back and has since hovered around the $38 and 5% dividend yield levels.
From this standpoint, adding some AT&T stock here could make sense. It’s around that all important 5% dividend yield level which normally represents a bottom in the stock. That means downside risk is greatly limited.
It also helps that near-term profits could get a boost due to weak iPhone 8 sales. Because iPhone 8 sales have been so weak, big telecom companies haven’t been running as many promotions. For example, BTIG Research points out that the iPhone 8 promotion from Verizon Communications Inc. (NYSE:V) is already over and “was both shorter lived and half as generous as last year”.
That is a nice near-term catalyst to couple with the 5%-plus dividend yield buying signal. Plus, there is also the potential for tax reform, which could immensely benefit AT&T, whose effective tax rate was 32.7% last year.
Bottom Line on AT&T Stock
Not much is going to change about the growth prospects of this company over the next several years. Cord-cutting is here to stay. So is the shift from wire-line to wireless. Global fiber optic demand will keep increasing. So will demand for faster wireless speeds.
But there are certain growth catalysts on the horizon which could generate some near-term excitement among the investor base.
The Time Warner Inc (NYSE:TWX) acquisition does offer the company an interesting opportunity to leverage unique entertainment assets like HBO to enhance AT&T’s value prop and grow its customer base. That deal looks like it’s going to go through. Plus, tax cuts are a potential speculative catalyst while less smartphone promotions could provide an incremental benefit.
These growth catalysts coupled with the stock trading around that all important 5% dividend yield levels makes T stock look like a buy here.
As of this writing, Luke Lango was long T.
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