Today, I’m going to explain why I keep buying AT&T Stock, despite its poor return over the
last year. This includes an updated look at their valuation and why I think the stock
keeps falling. But don’t worry, I’ll still give you an update on my entire long-term
dividend stock portfolio’s performance and all my recent buys. So let’s roll the intro.
(Intro Vid)
Before we start, I’d like to remind everyone that you can join a community discord server
and see my entire portfolio if you support on Patreon. Link in the description. With
that said, let’s dive into the numbers.
Since May 2020, I’ve gone from $32,939 to $68,154 dollars invested. My current dividend
yield on cost is 4.52% and my compounded yield, which takes in the effect of reinvested dividends,
is 4.72%. The increase from the previous month is not only due to me purchasing more of the
high-yielding AT&T, but also due to a small accounting error. I was previously counting
reinvested capital gains from selling stocks into my cost for dividend yield, but that’s
not entirely accurate. I like to use the metric of initial dollars invested, since reinvested
profits really are not cost, but part of the value gain. The differential between the dividend
yield and compounded dividend yield increased to .20%. That stat measures the snowball effect
from dividend reinvestment. In this chart, you can see how the value of
my dividend portfolio has changed over time. My current value is $88,546. For the most
part, this has risen with the general market, but remember value is often volatile and the
main goal of this portfolio is to build a growing source of dividends and free cash
flow generating assets. In this next chart, you can see my earned
dividends to date. In August, I earned $196.20 in dividend income. This gives me a 3 month
rolling average of $226.40. Notable recent payments include $131.69 from AT&T and $47.87
from EPD. I reinvest these dividends to acquire more shares, increasing my future payouts.
So with AT&T, I got 4.65 more shares of the company. This is the dividend snowball in
action. On top of reinvesting, many companies increase their dividend payouts over time.
For example, in the last month, MO had a 4.65% dividend raise, SMG had a 6.4% raise, and
FRT had a 1% raise. Here you can see my cost allocation by sector.
Communication Services is my largest at 28.9%, followed by Consumer Defensive at 24.1%, Technology
at 13.1%, and Energy at 13%. Alright now let’s look at my recent buys.
I purchased 70 shares of AT&T at an average cost of $27.32, giving me a 7.61% yield on
cost. More on this later. I bought 10 shares The J.M. Smucker company at an average cost
of $122.34, giving me a 3.24% dividend yield on cost. This is a new position of mine and
I’ll likely do a stock review video in the coming weeks. It’s another food company
with a portfolio of well-known brands in interesting categories. Finally, I bought 4 shares of
The Walt Disney Company at an average cost of $172.28. I just made a short video, giving
my analysis on when Disney will bring back their dividend. So definitely check that out
if you’re a long-term investor in Disney. Now let’s get to the topic of the day, Why
I keep buying AT&T Stock. Quick recap of the situation. In May, it was announced that AT&T’s
WarnerMedia would be spun out to join with Discovery, forming the new company Warner
Bros. Discovery. This deal is expected to go through in mid-2022 and AT&T’s shareholders
will receive stock representing 71% of the new company. However, in this news, it was
also announced that AT&T’s dividend would be reduced following the completion of the
deal. According to the CEO, “The remaining AT&T assets will aim to give shareholders
a dividend payout ratio of between 40% and 43%, based on anticipated free cash flow of
around $20 billion.”. The current payout ratio is around 60%, so not only will they
generate less overall cash flow, they are giving a lower percentage of it back as a
dividend. It’s unlikely the media company will pay a dividend, so overall you get a
lower payout. If you want a full explanation of this deal, I made a video about it at the
time, which is linked here. Ever since this was announced, AT&T stock
has been in a free fall. It’s decreased over 16% and continues to trend downward.
This is what many people would call a falling knife, so why do I keep buying? Well, it’s
because I’m looking at this from the perspective of a long-term investor, not a short-term
trader. If you know the facts, you should be happy when a stock’s price goes down
because you can buy more at a better valuation. So that’s what I did. My old cost basis
was around $28.49, which I thought was a great deal, and as the price fell below, I’ve
bought more. The overall free cash flow and capacity of
the company to pay dividends remains unchanged. AT&T is a free cash flow machine. Their core
broadband and cellular business is extremely reliable and will generate slowly growing
free cash flow for decades. I’m bullish on the media properties and potential streaming
growth. AT&T is trading at 8.5 times earnings per share and less than 7 times free cash
flow per share. This is extremely cheap in today’s market environment. I will note
this is not just AT&T, Verizon is also undervalued. In fact, I would be buying Verizon, if it
wasn’t for AT&T being more compelling. It’s even cheaper and offers a play into a high-quality
media company. So when I’m buying AT&T stock, I’m really
buying 2 companies. The new AT&T, which is a more focused communications business looking
closer to Verizon, with decreased debt, and an increased ability to invest in future growth.
Then the new media company, Warner Bros Discovery, which I think will be a strong third in entertainment
behind Disney and Netflix. Over the long term, I see this deal as value creation. The only
negative I see is the dividend cut, but that may be better for the health of the company
long term. All this said I do think it’s probable the
stock will continue to do poorly until the split. That is the only catalyst I could see
changing the narrative. In the meantime, I’m trying to reinvest as much dividends as I
can prior to the split and buy more if it continues falling.
Thank you for watching Dividend Data. I’d greatly appreciate it if you leave a like
and subscribe to the channel. If you follow me on Twitter, link in the description, you
can real-time updates of my buys and dividends coming in. Also, you can follow me on Instagram
at dividend data. You can support the channel over on Patreon, where you can gain access
to a community discord server. The link is in the description. Please leave a comment
below and thank you for watching!