As a result, AT&T Inc. (NYSE:T)’s dividend yield has declined significantly, and the company is trading at a lofty valuation. Should investors continue to buy the stock? Or would you be wise to wait for a better price before jumping in?
The other industry titan
The telecommunications industry in the United States is essentially a duopoly, whereby two huge companies dominate the space. AT&T is one industry titan, and Verizon Communications Inc. (NYSE:VZ) is the other.
AT&T Inc. (NYSE:T) and Verizon are nearly identical companies, in terms of their product offerings as well as how their stocks trade. Both stocks hold extremely similar valuations and provide comparable dividend yields to shareholders.
However, it’s worth noting that Verizon Communications Inc. (NYSE:VZ) has outperformed its major rival in recent months. The company’s first-quarter consolidated earnings per share rose 15% year over year. In particular, the success of Verizon’s Wireless segment continues to impress: Verizon Wireless realized 8% year-over-year increases in both service revenues and retail service revenues, and achieved record operating and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins.
It’s not as if AT&T is performing poorly, though. For its part, the company posted 12% higher quarterly diluted earnings per share year over year, and nearly $4 billion in free cash flow.
Not all telecoms are created equal
While investors might understandably assume that telecom stocks are one and the same, doing so would be a mistake.
For example, fellow telecom CenturyLink, Inc. (NYSE:CTL) was once one of the sector’s higher-yielding stocks, but investors received a rude awakening on February 14, when they found that their company had cut its dividend 25% amidst providing disappointing fourth-quarter and full-year results.
CenturyLink’s decision to cut its dividend was a curious one, since the company did not appear to be in dire financial shape. CenturyLink, Inc. (NYSE:CTL)’s full-year 2012 revenues grew 20% and its earnings per share inched up 1% year over year. However, the company was clearly concerned about its ability to pay down debt, and the new reduced dividend level will help the company shore up its financial position going forward.
That being said, telecom investors take their dividends pretty seriously, and for good reason. After all, one of the biggest reasons for investing in the industry in the first place is the hefty payout. As a result, investors shouldn’t waste their time on a telecom stock that cuts its dividend.
The Foolish conclusion
With regard to the two major industry players, I would classify each stock as a good hold. On the plus side, investors will surely continue to receive those quarterly dividend checks for many years to come, since both AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) produce solid free cash flows. Moreover, each of them should continue to slightly increase their dividends on an annual basis.
That being said, it needs to be acknowledged that buying AT&T or Verizon today is a much riskier proposition than it was just a couple years ago. Each stock yields more than 4% at recent prices, which sounds great considering the S&P 500 yields only 2%, but less so when you realize that each telecom stock yielded 6% as recently as late 2011.
Furthermore, both Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) have rallied to multi-year highs, and I’m rarely comfortable buying a stock after it’s already rallied so strongly. I would be much more interested in each stock if they yielded closer to 5.5%, which would represent a target price of $32.72 on AT&T. It appears that investors would be exercising prudence to wait for a more attractive buying opportunity.
The article Is AT&T a Good Stock to Buy? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
