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Buy AT&T for a Steady Dividend Income

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We believe that current fall in AT&T (NYSE: T) is a good buying opportunity for the investors who want to own dividend stocks. At the current levels, the stock offers an attractive dividend yield of 5.73%. The stock is also likely to show capital appreciation in the long-term. Therefore, we recommend a long position in AT&T at the current levels.

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Key takeaways

  1. AT&T’s sharp slide offers an attractive entry opportunity in a dividend aristocrat
  2. AT&T and Time Warner deal is likely to be delayed, but should go through
  3. AT&T’s debt is a concern
  4. For the near to medium-term, the dividend raises should continue

The stock is down about 20% year-to-date. Such a fall, especially in a dividend aristocrat, is because of concerns on the continuation of dividend payouts. Therefore, let’s analyze the stock’s financials and its business to determine whether it’s a value trap or an attractive buying opportunity at the current levels.

Dividend paying history of AT&T

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Dividend Aristocrats are companies that have increased payouts for 25 consecutive years. AT&T is part of that distinguished list, as it has increased dividends for 33 straight years. It managed to keep its record intact even during the dotcom bubble and the financial crisis, which gives us confidence. Until the situation turns grim, the company will continue raising its dividend and retain its name in the distinguished list.

Well, if it is such a no brainer, the price of the stock shouldn’t have plunged. There must be certain concerns, which have led the investors to sell the stock. Let’s evaluate them.

The Justice department is opposing the AT&T and Time Warner deal

AT&T operates in a capital-intensive sector where growth has already peaked. Therefore, in order to grow, the companies resort to mergers and acquisitions. In 2015, AT&T completed the purchase of DirecTV – the largest pay TV provider – for about $49 billion. Just a year later, the company agreed to buy Time Warner (NYSE: TWX) for about $85 billion.

The huge content of Time Warner – owner of CNN, HBO and Warner Bros. – and the reach of AT&T has great synergy. The deal was initially expected to close by the end of this year but the Justice Department is opposing the deal. Therefore, AT&T’s chief financial officer, John Stephens said during a recent investor conference that “the timing of the closing of the deal is now uncertain.”

Nevertheless, the executives of the two companies are unlikely to give up without a fight, as they believe that the Justice Department doesn’t have the legal grounds to deny this deal. The final outcome is likely to be decided in the court of law.

Huge debt even if Time Warner deal is approved

Unless AT&T invests to upgrade its business, or acquire companies, which have a good synergy, it will not be able to compete and stay ahead of its competitors. Hence, the investors don’t expect the company to remain debt free. However, the debt should not be unserviceable, endangering future dividend payouts.

The current debt to EBITDA of AT&T is 2.19 times. On completion of the Time Warner acquisition, the debt/EBITDA is likely to increase to 2.8 to 3 times. The management wants to bring down the debt level, as soon as possible. This casts a doubt over the continued dividend raises. Will the company sacrifice the dividend for debt repayment?

Unlikely.

AT&T has been cash flow positive for more than a decade. Companies pay out dividends from their free cash flows. The payout ratio has mostly ranged between 52 to 70% with the odd spike to 94% in 2014.

This year, the company generated a free cash flow of $12.8 billion in the first three quarters and paid out a dividend of $9 billion, resulting in a payout ratio of 70.5%. The management has maintained its guidance for 2017 and is likely to end the year with a free cash flow of $18 billion.

On the other hand, Time Warner has generated a free cash flow of $3.57 billion in the first three quarters of this year. In 2016, the company had earned a free cash flow of $4.25 billion. Let’s consider a conservative estimate and expect the company to earn only as much as last year.

If the deal receives the green signal before the end of the year – though highly unlikely – the combined entity will end the year with a free cash flow of $22.25 billion.

After the merger, due to the equity dilution, AT&T’s dividend liability will increase to $14.5 billion.

For the nine months ended September 30, the company paid an interest of $4.3 billion. So, for the whole year, the company may end up with about $6 billion in interest expense. Add the additional $1.3 billion, which AT&T has to bear on assuming new debt following the Time Warner deal and the total comes to $7.3 billion.

Adding the interest expense and the dividend payout, we get a figure of about $21.8 billion. This doesn’t leave the company with enough money to allocate for debt reduction.

However, the figure also doesn’t put the dividend in danger, as it can easily be accomodated in the free cash flow. But, is there a danger that AT&T’s free cash flows will decline in the short-term or the medium-term?

Financial performance of AT&T

2012 2013 2014 2015 2016
Revenue in billions 127.43 128.75 132.45 146.8 163.79
EBITDA in billions 31.14 48.87 32.14 46.65 51.72
EPS diluted 1.25 3.39 1.19 2.37 2.1

 

From the above figures, we find that AT&T has been able to gradually increase its revenues for the past five years. Similarly, the EBITDA has been on a gradual uptrend, which shows that the company has been able to maintain its profitability.

How has the company performed this year?

The company has so far maintained a flat performance in 2017.

In the third quarter of this year, the company’s revenues fell from $40.9 billion in 2016 to $39.7 billion. Similarly, the reported earnings per share (EPS) also fell from $0.54 to $0.49, which shows a marginal slowdown.

While the result is not something to write home about, it is not an outright disaster as well.

Analyst forecasts

According to Nasdaq.com, the analysts forecast a long-term growth rate of 4.8%. The consensus 12-month price target is $40, which is a good 17% above the current price of the stock.

With the likelihood of the small dividend raise intact and a possibility of price appreciation, let’s see what does the chart point to.

What does the chart forecast?

The stock had been forming a large ascending triangle pattern. However, three weeks back, the stock broke below the strong trendline support, which is a bearish sign. Nevertheless, the stock has a strong support at the $32, which has not been broken on a weekly closing basis since mid-2012.

On the upside, the trendline, which had been acting as a strong support until now is likely to act as a stiff resistance. However, In the long-term, if the stock climbs above the trendline at $36, a move to $40 and thereafter to $43 is possible.

Risks

If interest rates rise quickly, AT&T’s interest expenses will rise. Additionally, if the company is unable to stay ahead of the competition, its free cash flows will decline and the dividend payouts will be in danger.

However, this is unlikely to happen within a single quarter. We shall continue to track the stock and its financials.

Portfolio

In order to track our investments better, we shall maintain active portfolios for dividend and growth. This will help us compare our performance with the markets.

In that step, we shall include AT&T as the first stock in the dividend portfolio at the current levels of $34.22.

Featured image courtesy of Shutterstock. 

 

 

 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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2 Comments

2 Comments

  1. jeffc89

    November 15, 2017 at 8:27 am

    Good article Rakesh, I will look to invest in AT&T. Thanks!

    • Rakesh Upadhyay

      November 15, 2017 at 10:20 am

      Hello jeffc89,

      Thank you. We shall keep track of the company, as we have included it in our portfolio.

      With warm regards
      Rakesh Upadhyay

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Stock Picks

Stock Picks: Fluor Corporation and F5 Networks Incorporated

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The S&P 500 (SPX) showed indecision yesterday, April 23, as it moved as high as 2,682.86 but closed the day at 2,670.29. If the index once again revisits 2,600, the support may no longer hold. Stay defensive and only invest in stocks that have strong bullish sentiments like the names that we have below.

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FLR – Fluor Corporation

Fluor Corporation (FLR) is a multinational Fortune 500 publicly-traded engineering, procurement, fabrication, construction (EPFC) and maintenance company founded in 1912. It provides engineering, procurement, construction, fabrication and modularization, commissioning and maintenance, and project management services in the following segments: Energy, Chemicals & Mining; Industrial, Infrastructure & Power; Government, and Maintenance, Modification & Asset Integrity (MMAI). The company’s subsidiaries include American Equipment Company, Inc., Otay River Constructions, and ADP Marshall, Inc., among others.

Technical analysis show that FLR has taken out resistance of 60 on April 23, 2018. The price action triggered the large inverse head and shoulders pattern on the weekly chart. The breakout was validated by heavy volume as volume rose by over 107% yesterday. In addition, the RSI is not yet in overbought territory. Expect the stock to follow through in today’s trading to further validate the trend reversal.  

Furthermore, fundamental analysis show that the trailing twelve months (TTM) price to earnings ratio (PE ratio) of FLR is 45.21. While the PE ratio tells us that the stock is already expensive, its five-year maximum of 58.92 shows that it has some more room for growth.

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The strategy is to buy as close to 60 as possible. If bulls continue to hold this level, they may create a base and move to our target of 80. The process may take more than a year.

Weekly FLR Chart

Monthly FLR Chart

As of this writing, the Fluor Corporation stock is trading at 61.48.

Summary of Strategy

Buy: As close to 60 as possible.

Target: 80

Stop: 54

FFIV – F5 Networks Incorporated

F5 Networks Incorporated is an American company that develops, markets, and sells application delivery networking (ADN) for the security, performance, availability of servers, data storage devices, and other network and cloud resources. It offers products based on its Traffic Management Operating System (TMOS) and Access Policy Manager (APM). The company operates primarily in the United States but also in Europe, the Middle East, Africa (EMEA), Japan, and the Asia Pacific region (APAC). F5 Networks was incorporated in 1996.

Technical analysis show that FFIV has taken out 149 resistance on April 13, 2018 and triggered the large cup and handle pattern on the daily chart. The price action was validated by extremely heavy volume and a follow through that saw the stock go as high as 161.58 on April 17. At this point, however, FFIV was already flashing overbought signals. It needs to correct and create a new base to keep its ascent sustainable. That’s where you can come in.

In addition, fundamental analysis show that FFIV’s trailing twelve months (TTM) PE ratio stands at 24.34. It may look like the stock is already fairly valued but it’s five-year maximum of 33.68 indicates that investors believe in the company’s potential for growth.

The strategy is to wait for the dip and buy as close to 149 as possible. As long as FFIV is above 149, it has enough bullish momentum to reach 183.

The process may take more than a year.

Daily FFIV Chart

Weekly FFIV Chart

As of this writing, the F5 Networks Incorporated stock is trading 157.72.

Summary of Strategy

Buy: As close to 149 as possible.

Target: 183

Stop: close below 140.

 

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 149 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Stock Picks: General Motors and Everest RE Group

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The S&P 500 (SPX) appears to have filled the gap between 2,695.68 and 2,709.79 on the daily chart as the index went as high as 2,717.49 on April 18. However, it seems that SPX has generated another lower high. Unless the index can move above 2,720 soon, it is in danger of creating a bearish descending triangle pattern.

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With the SPX showing signs of weakness, let’s look at stocks that are near firm support levels.

GM – General Motors Company

General Motors Company (GM) is an American multinational corporation that designs, builds, and sells cars, trucks, crossovers, and automobile parts. Founded in 1908, it now has 180,000 employees across 35 countries worldwide. The company’s operational segments include GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), GM South America (GMSA) and General Motors Financial Company, Inc. (GM Financial). In General Motors’ portfolio are the brands Buick, Cadillac, Chevrolet, GMC, Holden, and Wuling.

Technical analysis show that GM has taken out resistance of 37 on September 8, 2017 and triggered the inverse head and shoulders reversal pattern on the weekly chart. The stock went as high as 46.76 on October 24, 2017 and hit the target of the pattern before it retreated and dipped to 34.50 on March 27, 2018.

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The stock, however, has recently reclaimed 37. As long as that level holds, the large cup and handle pattern on the weekly chart is still in play.

In addition, fundamental analysis show that the trailing twelve months (TTM) price to earnings ratio (PE ratio) of GM is 21.35. While the PE ratio looks as if the stock is already fairly valued, its five-year maximum shows that it has still room to grow. GM’s maximum TTM PE ratio in the last five years was 32.18. Based on this number, we can say that GM has some more upside potential.

The strategy is to buy as close to 37 as possible. If bulls continue to hold this level, they may create a base and crawl to our target of 54. The process may take more than a year.

Weekly GM Chart

Monthly GM Chart

As of this writing, the General Motors Company stock is trading at 37.61.

Summary of Strategy

Buy: As close to 37 as possible.

Target: 54

Stop: 34.50

RE – Everest RE Group Limited

Everest Re Group (RE) is a company engaged in insurance and reinsurance underwriting. Founded in 1973, its products now range from property and casualty reinsurance to marine, aviation, surety, errors and omissions liability (E&O), directors’ and officers’ liability (D&O), medical malpractice, accident and health (A&H), and workers’ compensation insurance.

Technical analysis show that RE bottomed out in December 2017 when it dropped to 208.81. The stock has been rallying since and has even managed to go as high as 264.88 on March 21, 2018. Bears repelled the advance, but the stock appears to be carving a bullish higher low setup above 240. If this level holds, RE may use it to take out 265 resistance.

Moreover, fundamental analysis show that RE’s trailing twelve months (TTM) PE ratio stands at 22.13. This looks like a reasonable PE ratio but it’s five-year maximum of 38.36 indicates that investors are willing to pay a premium. In other words, RE has some more potential for growth.

The strategy is to buy at current market level. If the stock holds the higher low of 241.80, bulls will likely use it to create a base and breach 265 resistance. Once breakout is complete, the stock may march to our target of 320.

The process may take more than a year.

Daily RE Chart

Weekly RE Chart

As of this writing, the Everest RE Group Limited stock is trading 246.99.

Summary of Strategy

Buy: At current market price of 246.99.

Target: 320

Stop: 241.80

 

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 149 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Stock Picks

Stock Picks: Essex Property Trust Incorporated and Edison International

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The S&P 500 (SPX) resumed its climb yesterday, April 16, 2018, as it closed at 2,677.84. The price action encourages those who bought around 2,600 to keep holding their positions. This helps ease selling pressure, which may help bulls continue their ascent to the top end of the range at 2,800.

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As the index shows signs of life, let’s look at stocks that are about to breakout.  

ESS – Essex Property Trust Incorporated

Essex Property Trust (ESS) is a publicly-traded real estate investment trust (REIT) company that acquires, develops, redevelops, and manages apartment communities. Founded in 1971, what started from 16 multifamily communities has now grown to 59,645 homes in 250 communities. The company operational segments include Southern California, Northern California, and Seattle Metro.

Technical analysis show that ESS is primed to take out resistance of 244 and trigger the large inverse head and shoulders pattern on the daily chart. To breach the resistance, the stock must print volume of at least 1 million shares on the daily chart. Bottom pickers are likely to dump positions at the resistance. ESS needs breakout buyers to come out and overwhelm sellers.

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In addition, fundamental analysis show that the trailing twelve months (TTM) price to earnings ratio (PE ratio) of ESS is 37.33. While the PE ratio looks high, it is still way below the stock’s five-year average of 54.99. Based on these figures, we can say that ESS has some more room to grow.

The strategy is to buy the breakout at 244 after the stock generates volume of 1 million shares. If bulls take out 244, they will gather enough momentum to sustain a climb to our target of 268. The process may take six months.

Daily ESS Chart

Weekly ESS Chart

As of this writing, the Essex Property Trust Incorporated stock is trading at 245.30.

Summary of Strategy

Buy: Breakout at 244 as long as the stock prints over 1 million in volume on the daily chart.

Target: 268

Stop: Close below 240 after the breakout.

EIX – Edison International

Edison International (EIX) is a public utility holding company. Founded in 1886, it is the parent company of Southern California Edison Company (SCE) and Edison Energy Group Incorporated (Edison Energy Group). SCE supplies and delivers electricity to Southern California, while Edison Energy Group is a holding company for subsidiaries focused on finding business opportunities across energy services.

Technical analysis show that EIX is poised to take out resistance of 65 and trigger an inverse head and shoulders reversal pattern on the daily chart. This comes after the stock generated a higher low of 61.47 on March 26, 2018.

To complete the breakout, bulls must generate volume of at least six million shares on the daily chart. Those who bought the bottom and those who bought the higher low are likely to take profits at the resistance. The market needs buyers to absorb the selling pressure.

Moreover, fundamental analysis show that EIX’s trailing twelve months (TTM) PE ratio stands at 38. This looks like a high PE ratio but it is still low in relation to its five-year PE ratio range which is 10.57 – 225.55. With such a wide range, EIX has a lot of upside potential.

The strategy is to buy the breakout at 65 as long as the volume requirement is met. If bulls complete the breakout, they will gather enough momentum to push EIX to our target of 72. The process may take more than a month.

Daily EIX Chart

Weekly EIX Chart

As of this writing, the Edison International stock is trading 64.64.

Summary of Strategy

Buy: Breakout at 65 as long as the stock prints over 6 million in volume on the daily chart.

Target: 72

Stop: Close below 63 after the breakout.

 

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 149 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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