2. AT&T (T) : Yield 5.4%
AT&T is one of the most beloved high-yield blue-chips on the market and for good reason. Management just increased its dividend for another year. (AT&T has increased its dividend each year for 31 straight year and is a member of the S&P Dividend Aristocrats Index.) With a 5.4% yield, courtesy of the market's concerns about the recently announced $85 billion buyout of Time Warner, this is a great time to open a position or add to this blue-chip core holding.
After all, while AT&T is mostly known for its wireless business that serves 131 million customers, over the past two years the company has evolved into so much more. Assuming the Time Warner merger is approved, AT&T will own:
- AT&T Wireless
- DirecTV, including a 41% stake in Sky Mexico, and subsidiaries like Sky Brazil, and Sky Panamerican, a dominant force in Latin American satellite TV
- HBO and Cinemax
- Turner Broadcasting: CNN, TBS, TNT, Cartoon Network, Adult Swim
- Warner Brothers: DC Comics, Warner Brothers Studios, Half of The CW, 10% of Hulu
In other words, AT&T has gone from a U.S. telecom utility to being poised to become a global telecom and media empire second only to Walt Disney.
And while it's true that the Times Warner acquisition, which is being half by debt and half by stock, will lead to higher debt and shareholder dilution, the deal will still be immediately accretive to both EPS and free cash flow per share.
That means that AT&T's current trailing-12-month free-cash-flow payout ratio of 67%, which makes the dividend highly secure, should only decrease with time. That's especially true given that management still has $3.3 billion in cost savings it thinks it can squeeze out of existing assets by 2020.
Add to this the $3.6 billion in free cash flow from Time Warner, plus $1 billion in expected synergies by 2018, and AT&T is likely to increase its FCF by 50% over the next four years to close to $25 billion. Of course, dividend growth investors will need to be patient before expecting dividend growth to accelerate, because AT&T will need to divert a lot of that cash flow toward paying down the $65 billion in debt it's taking on for this deal, as well as funding buybacks to offset the dilution created by creating additional hares.
Beyond 2020, when AT&T's balance sheet is once more strong, and the share count is far smaller, we fully expect that dividend growth could accelerate to 2 cents to 3 cents per quarter, or 4% to 6% CAGR. This means long-term investors buying now can expect total returns over the coming decade of 9.3% to 11.3%, which are fantastic considering the low volatility of the stock (beta 0.3).