Connect with us

Stock Picks

Buy AT&T for a Steady Dividend Income

Published

on

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.

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

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

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.




Feedback or Requests?

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

You must be logged in to post a comment Login

Leave a Reply

Analysis

Waiting for the Costco Earnings Report

Published

on

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

Retail companies are among the best investment choices right before the New Year. Let’s see whether it is really true by analyzing Costco, a retail company whose Q4 earnings report is due on Dec 13.

Costco Wholesale Corporation (NASDAQ: COST) is the largest self-service warehouse chain across the globe and the fifth retail company in the US with the most sales. The company sells domestic appliances, foods, chemicals and cleaning agents, clothes, consumer electronics, etc. There is a loyalty program, and members get discounts. Among the members, around 90% are active customers. Costco is conquering the e-commerce world, too, but online sales contribute just 4% to the entire revenue, so the potential here is great.

The company buys products right from the manufacturers and sends them to warehouses, where they are sold to consumers. This saves time and money on multi-level distribution while maximizing the turnover and sales. Currently, there are 768 Costco warehouses in the world, including 533 in the US, 10 in Canada, 39 in Mexico, 28 in the UK, 26 in Japan, 15 in South Korea, 13 in Taiwan, 10 in Australia, two in Spain, and one in France and Iceland. With Costco stock being quite choppy, it has still been a safe haven for most investors, as both the stock price and the dividends have been growing steadily. Over the last 24 months, Costco was better than such competition as Target Corporation (NYSE: TGT), Kroger (NYSE: KR), and Walmart (NYSE: WMT), performing even better than S&P 500.

Costco earnings are season-based, yet its overall trend is ascending.

The debt to equity ratio is under 1.00, while the shorts are just 1.20%. Costco is interesting for investors mostly because of its dividends it’s been paying for over 15 years. In 2004, one share paid $0.10, while in 2018 it is $0.57. The share price also rose considerably, from $40 to $240, which was a great profit for long-term investors (6x+).

In November, retail sales amounted to $12.77B, which is 9.80% more than 12 months ago. The Q4 earnings report may be positive as well. Kroger (NYSE: KR), which had already reported its earnings, exceeded analysts’ expectations, which proves Costco’s report may trigger the same effect.

Fundamentally, there are no negative factors across the board, while, technically, one may want to wait for a better chance that will surely come. The report due this week is 90% likely to exceed expectations, that will push the stock upwards in the short term. However, in W1, one can see the stock has been growing abnormally since June and is well above the 200-day SMA. This is usually followed with an appropriate correction. Besides, when the stock hit $250, its volatility increased.

In terms of candlestick analysis, there are two engulfing patterns, which means the price may start falling soon. It may well test $200 and then go up again, in case there’s enough volume coming from the investors’ interest.

On D1, the stock may rise in the short term because of the good earnings report, as mentioned earlier. This is confirmed by both the support at $218 and the increase in volume. This increase, however, is becoming more and more humble over time. Thus, in case $218 gets broken out, the price may go down, which is confirmed with W1 chart. Buying COST right now expecting a good earnings report on Dec 13 is risky.

The price may rise only in case the report beats expectations, though; otherwise, the stock may fall down quickly to reach $200.

Overall, trading Costco straight away is not the best idea and will suit only those who are hunting for adrenaline. The company looks well attractive for a long-term investment next year, but waiting for a better price is the best thing you can do.

Costco is popular with hedge fund managers, too. As of late Q3, 39 hedge funds had it, including Warren Buffett’s Berkshire Hathaway, with Costco shares worth over $1B.

The P/E is 31.50, which means you will need quite a lot of time for your investment to prove profitable (Apple’s P/E, for instance, is 13.87). Thus, it’s better to wait until the hype comes down, and only then take a long position on Costco Wholesale Corporation.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held Company for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.5 stars on average, based on 20 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




Feedback or Requests?

Continue Reading

Analysis

General Motors Fires 27,000 People, Stock Jumps by 5%

Published

on

By Dmitriy Gurkovskiy, Chief Analyst at RoboMarkets

In early November, we commented on GM, arguing that the stock may reach $40. Not much time has passed, and yet many key events occurred, which increased the volatility in General Motors’ stock. Currently, any major rise is unlikely, as Donald Trump is now taking part in this.

Until recently, things were quite in line with the technical analysis, with the stock correcting to $33.80 and then going up to reach $40.

See the prediction chart we made on Nov 2, below:

On Nov 26, however, GM announced its cost reduction campaign that included firing up to 15% of the employees and around 25% of the management, as well as closing the factories in Michigan, Maryland, and Ohio in the US, and Ontario, Canada.

This was very bad news for the families of the fired employees, but the investors liked it, which pushed the stock up by 5% within a single trading session.

This job cut is of course not in line with Trump’s policy; while the US president is trying to bring the manufacturing back to the US by cutting the tax rates, GM is closing the US based factories, while still maintaining those in Mexico and China. Trump finally said the US government might cut off the tax exemptions for GM,

And this can be well understood. This is not only about the job cut. In 2009, the US government paid $30B just to save the company, which then went public right after bankruptcy. Now, 9 years later, GM is closing its US based factories, but still maintains those in Mexico, where the local government also took part in rescuing the company.

GM reacted on the president’s words with a comment that the trade wars led by Trump made the steel and aluminum import more expensive, which meant the exported GM products were no longer as competitive as before. The major reason lies, however, in bad sales of automobiles. The Q3 earnings report was good, but not because sales were high; rather, it was because car prices went up.

By cutting production, GM is going to save up around $6B, thus doubling its investment into electric car development, including driverless ones.

The only company that wants to increase the manufacturing capacity in the US is Tesla, and, for it, the GM news is very good, as the company may buy the factories being closed and start producing Tesla cars there. This made the Tesla stock rise by over 1%. It would rise much higher in case the decision by GM was final, but it is not.

GM may still keep the US based factories, closing only those in South Korea next year. However, it remains to be seen whether economic and social pressure will get GM to reverse its decision or prolong its factories in North America.

If this is the case, it will be a win-win, as investors will get a higher stock price, the government will keep the jobs, and GM will get additional privileges.

However, GM may still close the US factories, and in this case, nothing may be predicted for sure. Trump’s policy is well unpredictable anyway, and his threats on GM losing its tax exemption privileges may come true. GM will anyways get the positive effect of the factories closing in the short term, but, in a longer term, the company’s activities in the US may suffer a lot. In this case, everything will depend on the factories in the rest of the world, where GM has better conditions.

Thus, fundamentally, the outlook is uncertain and somewhat negative. Let’s see what we can do here with some tech analysis.

Support and resistance levels are key here. The resistance at $37 formed after the earnings report and was active for around a month. Over this time, a key support appeared at $34, then other support levels formed at $35 and $36, which finally broke out the resistance at $37.

It was first broken out when the job cut news came in, but then Trump’s criticism made the price correct; still, it was soon back near $37.

Thus, the report led to a high demand for GM shares, which was followed by a consolidation, as all positions had been taken and the market needed new buyers. Nobody wanted to buy at $37, though, so the price pulled back to $34, where it actually had been before the report came out.

This motivated investors to buy at this good price, and the stock went up quickly.

While the price was going up, new support levels were being formed, which could signal an uptrend. A new support was formed at around $35, which means the investors were no longer expecting any major pullbacks.

When the news on GM job cut came out, new buyers jumped in, which pushed the stock over $38. Those who were late to buy were waiting for a pullback to buy at a better price, which formed another support at $36. The price then went up to $37, where it is currently now.

All this means is that investors have been adding long positions in GM over the last two months, the short float is very low, just 1.99%.

A large amount of longs has a drawback: in case most investors decide to quit, this will lead to a sharp decline. Thus, it is important to find the expected exit point.

In order to find it, one should determine when the stock became popular. This can be easily found at the moment when the earnings report came in.

This particular price level, $33, is a good stop loss; right here, the investors may stop expecting the price to rise and start closing their positions.

Disclaimer

Any predictions contained herein are based on the authors’ particular opinion. This analysis shall not be treated as trading advice. RoboMarkets shall not be held liable for the results of the trades arising from relying upon trading recommendations and reviews contained herein.

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

4.5 stars on average, based on 20 rated postsHaving majored in both Social Psychology and Economics, I went on to continue my education in post graduate. Later I worked as a team lead of a tech and fundamental analysis lab in the Applied System Analysis Research Institute. This helped me to acquire all necessary skills and experience to become a successful trader and analyst, as well as a portfolio manager in an investment company. I'm a pro in the financial field and the author of articles for various international media. I also hold the position of Chief Analyst at RoboMarkets.




Feedback or Requests?

Continue Reading

Stock Picks

Stock Pick: Alphabet Inc. (Parent Company of Google)

Published

on

Alphabet Incorporated (GOOGL) is a company that needs no introduction. The multinational conglomerate was established through the corporate restructuring of Google in October 2015. With the reorganization, Alphabet has created two segments: Google and Other Bets. Google focuses on internet products such as YouTube, Search Ads, Google Play and others while Other Bets specializes in selling internet and television services. The company had a net income of $12.662 billion in 2017.

Technical Analysis of Alphabet Inc. (GOOGL)

GOOGL has been correcting after posting an all-time high of $1,291.44 in July 2018. At that price level, the stock showed signs of bullish exhaustion. First, GOOGL had five attempts to get a weekly close above $1,254. However, each one failed because the volume was anemic. In addition, a long bearish divergence was spotted on the weekly RSI. As volume and momentum faded, price eventually followed.

Nevertheless, the pullback is giving us an opportunity to buy at a firm support level.

Technical analysis shows that GOOGL is headed to meet support of $995. This support level is strong as it used to be a firm monthly resistance back in May 2017. Bulls struggled to breach this area but they finally did it in October 2017. After that, the support was retested in April 2018. The retest led to the rally to the all-time high of $1,291.44.

With the S&P showing signs of weakness, we will just play the bounce to be on the safe side. Be sure to lock in profits once targets are reached.

Fundamental Analysis of Alphabet Inc. (GOOGL)

On top of our technical analysis, fundamental analysis also supports our short-term bullish view.

The parent-company Alphabet Inc. posted its third-quarter figures recently that beat expert estimates. Experts estimated an earnings per share (EPS) of $10.54 but the stock revealed quarterly earnings of $13.06 per share. With this development, GOOGL has gone above consensus EPS three times in the last four quarters.

In addition, its trailing twelve months price-to-earnings ratio is 39.59. While the stock may look overvalued, it is actually not far from its five-year average of 34.42. If you also consider that GOOGL has a five-year maximum P/E ratio of 66.23, then it is safe to say that the stock has some upside potential in the short-term.

The strategy is to buy on dips as close to $995 as possible. As long as the stock is above this level, it has the momentum to bounce to our targets of $1,112. Take that out and there’s a possibility of revisiting resistance of $1,254.

The timeline for the target is less than six months.

Weekly GOOGL Chart

Monthly GOOGL Chart

As of this writing, the Alphabet Incorporated stock (GOOGL) is trading at $1,055.94.

Summary of Strategy

Buy: On dips as close to $995 support as possible.

Target:  $1,112 and then $1,254.

Stop: Close below $976.

 

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
1 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 51 vote, average: 5.00 out of 5 (1 votes, average: 5.00 out of 5)
You need to be a registered member to rate this.
Loading...

3.8 stars on average, based on 287 rated postsKiril is a CFA Charterholder and financial professional with 5+ 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.




Feedback or Requests?

Continue Reading

Recent Posts

A part of CCN

Hacked.com is Neutral and Unbiased

Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

Trending