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Avoid AT&T And Its 6.73% Dividend

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

To help you figure out how to protect your retirement portfolio in these uncertain times, today I show you why to Avoid AT&T And Its 6.73% Dividend.

AT&T (T) is the third largest phone provider in the United States.

As of the end of 2020 it serves more than 80 million customers nationwide.  And it also owns stakes in Warner Media which owns cable networks HBO and Turner.

It’s one of the nations most famous “legacy” business operations with roots going back to 1885 when it was then known as the American Telephone and Telegraph company.

Because of its power and the breadth of its business it weather Covid fine… And from its low on March 23rd, 2020 to today in late April 2021 its stock is up 15.5% as you can see below.

But this is all in the past…

Today, I want to help you figure out whether it’s a great buy now for your retirement portfolio with all the uncertainty we’re dealing with today.

It’s based in Dallas Texas.  It has a $219.1 billion market cap. And it pays you a massive 6.73% dividend. Which is reason #1 to consider buying its stock.

AT&T’s 6.73% Dividend

Over the last decade AT&T’s paid out a total of $19.09 per share in dividends.

At today’s share count of 7.183 billion shares that’s equal to $137.12 billion paid out to shareholders in that time.

It also grew its dividend 20.2% from $1.73 per share in 2011 to $2.08 per share now.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns massive profits.  Which is reason #2 to consider buying AT&T for your retirement portfolio.

AT&T Earns Massive Profits

Over the last decade it earned an average operating income margin of 14.7% per year.

I look for anything above 10% so this is fantastic.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 12.5% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

AT&T surpasses both metrics which means it’s a world class business operation.

This shows the power of the company to survive and thrive – even during the worst economy we’ve seen since at least the end of World War 2.

But because of its business model it has a ton of debt.

AT&T Has A Huge Amount of Debt

Because of its business model in owning and operating cell phone lines and tower infrastructure… AT&T has a huge amount of debt.

Why?

Because the constant need to buy, upgrade, and maintain its these assets is extremely expensive.  As one example take the 5G build out that is going on worldwide right now.

This will cost hundreds of billions or trillions of dollars when combined over the next decade or so.

As of this writing T has $9.76 billion in cash compared to staggering $180.93 billion in debt.

As a percentage of its balance sheet total liabilities make up 68.2%. 

Debt makes up a gigantic 82.6% of its market cap.

And its debt-to-equity ratio is 1.1.

Most of the metrics look okay… But its absolute dollar amount of debt is not.

How much debt does AT&T have?  The second most on Earth for any company. Only behind automaker Volkswagen.

This is one illustration of why you can’t just rely on metrics when searching for investment.

Because of its constant need to invest and reinvest in its business its debt levels are enormous.

Plus, it’s also issued a ton of shares in the last decade to fund this growth and reinvestment as well.

From 2011 to today in 2021 its share count is up 220% from 5.950 billion shares to 7.183 billion shares.

All else remaining equal this means Kinder Morgan shares are worth 20.7% less now than they did in 2011.  Think of dilution like inflation – but for stocks.

This is a huge reason its stock is flat over the last decade as revenues and profits are up% in the last decade while its revenues and profits are up.

This debt is enough to keep me from recommending AT&T to you.  But let’s finish this out and see if its cheap or not?

AT&T IS NOT Cheap…

With the markets at or near all-time highs you’d expect might expect a hugely profitable stock like AT&T to be selling at an enormous valuation.

Unfortunately, it is.

As of this writing its P/E is 19.3

Its P/CF is 5.02.

Its forward P/E is 9.8.

And its enterprise value to operating income – EV/EBIT is 47.2.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics combined show that AT&T is massively overvalued right now.

And this means owning its stock does not give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With AT&T being overvalued right now, its stock does not offer you a large margin of safety.

This means you should avoid its stock due to its valuation and debt levels.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – Avoid AT&T and consider investing in one of the stocks below.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.


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