Hi, it's Homo-efficience.
Last Friday, while having dinner with friends, the conversation turned to how one might invest surplus funds (if only we had some!). As always, opinions ranged from real estate being the safest bet to avoiding stocks altogether. Suggestions like investing in high-quality corporate bonds also came up. Observing the current state of the U.S. stock market, I floated the idea of buying U.S. dividend stocks.
My rationale was simple: these stocks could provide stable dividends, preserve value, and offer the flexibility to reinvest when opportunities arise. If you're uncertain about where to invest right now, U.S. dividend stocks could be a solid choice for stability.
Although I don’t hold a large portfolio of U.S. stocks, dividend-paying stocks like T (AT&T), O (Realty Income), and MO (Altria) make up the majority of my holdings. While O and MO have been consistent performers, T has been more of an emotional rollercoaster. That said, looking back, all of them have yielded profits. Among these, let’s delve into the story of T (AT&T), which was once a flagship dividend stock but has tested investors’ patience over the years.
1. AT&T: The Glory Days
AT&T was once synonymous with dividend investing. It was even nicknamed "The Dividend King." Its reliable payouts and robust business model earned it a spot in many portfolios, especially among conservative investors and retirees.
Up until 2021, AT&T paid $0.52 per share quarterly or $2.08 annually, offering a dividend yield of approximately 8.72%. For those who purchased during the COVID-19 market dip, the yield exceeded 11%, making it an exceptionally attractive investment.
However, in 2021, AT&T decided to spin off its WarnerMedia division and merge it with Discovery to form Warner Bros. Discovery (WBD) in an effort to restructure its business and improve its finances. This marked the end of AT&T’s reign as a dividend champion.
2. Post-Spinoff: Dividend Cuts and WBD’s Stock Plunge
Following the WarnerMedia spinoff, AT&T drastically reduced its dividend, disappointing its loyal investors.
- The quarterly dividend was slashed to $0.2775 per share, or $1.11 annually, resulting in a dividend yield of approximately 4.64%.
- Since dividends were a cornerstone of AT&T’s appeal, this reduction significantly diminished its attractiveness to investors.
Additionally, AT&T’s share price suffered due to reduced investment appeal, the loss of growth opportunities in the media sector, and its still-high debt levels.
To make matters worse, shareholders who received WBD shares as part of the spinoff faced a massive devaluation, with WBD stock plunging over 60% and offering no dividends. For many AT&T investors, WBD shares became an unwelcome asset, unsuitable for their income-focused strategies. As a result, AT&T became a stock that cost its shareholders both dividend income and capital gains.
3. AT&T Today: Signs of Recovery
So, has AT&T managed to recover? From my perspective, as of late 2024, AT&T’s investment appeal has almost fully rebounded. Although my portfolio still shows a slight loss for AT&T, when factoring in WBD shares and dividends received, the overall value is nearly on par with pre-spinoff levels.
This recovery can be attributed to several factors:
- Undervalued Share Price:
After the dividend cut, AT&T’s share price dropped significantly. However, at current levels, it appears undervalued when considering its stable business model and growth potential. - Attractive Dividend Yield:
Despite the cut, AT&T still offers a compelling 7% dividend yield, which remains appealing compared to market averages. - 5G and Broadband Investments:
AT&T has made substantial investments in 5G networks and broadband infrastructure, which are expected to be key drivers of long-term growth.
4. Pros and Cons of Investing in AT&T
AT&T is regaining its position as a viable option for investors seeking stable dividends. Here’s a summary of its pros and cons:
- Pros:
- The dividend yield still exceeds market averages.
- Investments in 5G and broadband infrastructure promise sustained growth.
- Cons:
- The company’s high debt levels remain a risk.
- The loss of its media growth segment to WBD is a drawback, though this may have been a strategic move considering the ongoing consolidation in the media industry.
5. Conclusion: AT&T’s Return to Prominence
AT&T, once the darling of dividend investors, has faced challenges following its spinoff and dividend reduction. However, its current valuation and stable dividend yield make it worth considering again.
Of course, relying solely on past glory is unwise. A careful analysis of AT&T’s financials and growth strategies is essential before investing. That said, for those without a clear investment target, AT&T’s steady dividends and improving fundamentals make it an attractive option.
As always, remember that investment decisions are ultimately your responsibility. Thank you for reading, and I hope this post provided some valuable insights!
