Sunday, January 28, 2018

2018 A Value Play for my next Income Stock

AT&T commonly known as Telephone, is a stock that has not participated in this lovely bull run. I like value and find that when I stick to my guns and invest using my disciplined income stock selection criteria, I am eventually rewarded.  Just look at Caterpillar (CAT) or Darden (DRI.)

  • AT&T gains from tax law change should provide long term benefit to its shareholders. 
  • VZ benefits from tax law change will provide price improvements.
  • Income stock fundamentals make Telephone the better stock for income investors looking for value.
Just last week monthly call options expired and a number of my options were called away leaving me with the daunting task of investing the proceeds.  Where to put this money is a challenge as everything seems expensive.

I look back and think about the ridicule of picking Kohl's stock in January, 2017  @ $41.88.  Several dividend payments and call premiums later, I personally no longer own KSS.  I made a nice tidy sum on Kohl's which I considered a value and income stock at the time.  Notice the 2017 portfolio has benefited greatly.   

Symbol Price Basis Date Acquired Forward Annual Dividend Dividend Yield % Gain 
KSS $63.40 $41.88 1/17/2017 $2.20 3.47% 51.38%

Management for the Long Term

Some complain that AT&T is not looking out for its shareholders.   They should take tax benefits and provide a special dividend or at least announce a major hike in the quarterly dividend.   As an income investor, I would like an income surprise.

However, Telephone has not declared a special dividend and that is okay with me because I am investing for the ongoing dividend and the hope for future increases.

I like that Telephone is using much of it's tax benefit to invest in the future.  Notwithstanding the Direct TV and Time Warner acquisitions, AT&T has a long term vision I hope. Some portion of their windfall goes to current employees, some portion goes to investing in the future but none goes to us the share holders and that is ok.

Management for a price increase.

A recent Seeking Alpha article noted that the tax benefits will not help T.   You see Verizon will receive a similar benefit and they will use the windfall to add to earnings.  Price and earnings are related so I would expect Verizon, symbol VZ, to have a price increase.  

The case is well laid out in the article noted here and I agree with it.   Telephone will not be using the tax benefits to add to earnings; at least not yet; and I do think that we will have to wait for earnings growth before we get stock price growth.  VZ on the other hand may do better in the short term.

Telephone Fundamentals

Let's take a look at AT&T's income stock fundamentals.  Telephone closed at $37.82 on Friday 1/26/2018 midway between it's 52 week high and low.  Earnings per share do exceed dividend paid out but not by a lot and that is why T needs to invest in growth.   Debt to equity ratio is a bit higher than my maximum of 1 but the industry standard is also above 1.  Notice Verizon's D/E ratio is much greater than 2.

  T 1/26/2018 $37.82  
  D/E Ratio 1.31    
  E.P.S   $2.07  
  Dividend   $2.00  
  Dividend 3yr Growth 2.13%  

Verizon and Telephone Comparison

Look at these comparisons in the table below and perhaps you will agree with me that Telephone is a good pick for 2018.  Let's see how the year unfolds.  Hopefully we income investors will not only continue to collect the over 5% dividend, the modest dividend increases, and future potential.

Price 52 wk Hi 52 wk Low
T 37.82 42.7 32.55
VZ 54.72 54.77 42.8
Div Yld Last Div ^ 3 yr Av Div ^
T 5.16% 2.04% 2.13%
VZ 4.24% 2.25% 1.64%
3 yr Rev Growth D/E ratio
T 7.51% 1.31
VZ -0.02%
Use of Tax Savings
T Capital investing and 200,000 employees getting $1,000 bonus
VZ Tax savings added to Earnings per Shares (EPS)

On Monday I will execute my trade and record it in my portfolio to track.  I will also invest the same amount of money in the ETF that tracks the S&P 500 called SPY.  Over time, we can determine which was the better investment, SPY or the same amount invested in T.

M* MoneyMadam

Disclosure: Long AT&T
Bought on 1/29/2018 @ $37.27