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Will AT&T Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

AT&T (NYSE: T  ) has played a pivotal role as an early addition to the Dow Jones Industrials (DJINDICES: ^DJI  ) . But the company has transformed itself over the decades, overcoming the breakup of its landline monopoly in the 1970s to return as a wireless network powerhouse. What's next for the telecom giant? Let's revisit how AT&T does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at AT&T.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$197 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

4 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

2 years

Fail

Stock stability

Beta < 0.9

0.54

Pass

 

Worst loss in past five years no greater than 20%

(28.1%)

Fail

Valuation

Normalized P/E < 18

32.94

Fail

Dividends

Current yield > 2%

5.1%

Pass

 

5-year dividend growth > 10%

3.8%

Fail

 

Streak of dividend increases >= 10 years

29 years

Pass

 

Payout ratio < 75%

141%

Fail

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at AT&T last year, the company hasn't been able to earn back the 2 points it lost from 2011 to 2012. Yet the stock has done well, gaining almost 20% over the past year and continuing to support its high dividend yield.

AT&T has made major shifts in its changing emphasis from landlines to its wireless network over the past decade, but its core business model remains the same. By getting recurring revenue from largely captive customers, AT&T and rival Verizon (NYSE: VZ  ) justify their colossal capital expenditures on building out their respective networks. As a result, AT&T has more than enough cash flow not just to finance its debt but also to give shareholders impressive amounts of dividend income.

Yet the rise of smartphones has put AT&T in a bit of an earnings bind, as subsidies to smartphone makers sap immediate earnings upon their initial purchase. Although AT&T makes back those subsidies over the course of two-year contracts, the relative lack of competing networks makes locking customers in less valuable than it would be in a more competitive data-plan environment.

AT&T has historically stayed within U.S. borders, but the company may be looking to expand into Europe. Looking for growth is a reasonable strategy, but Europe seems like a tough place to do business. Competitive pressures from France Telecom (NYSE: ORAN  ) and Vodafone (NASDAQ: VOD  ) would make entering the market extremely challenging, and the fact that Europe is in recession by some measures has led some analysts to question the move.

For retirees and other conservative investors, AT&T is a safe dividend-rich pick. Focusing too much on P/E-based valuation will lead you to incorrect conclusions because of the accounting of its big network investments. With a combination of income and growth potential, AT&T deserves a close look from anyone looking to add telecom exposure to a retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills and teach you how to separate the right stocks from the risky ones.

Among the Dow Jones Industrials, you'll find plenty of promising dividend candidates. Find out which ones are the best by reading the Fool's newly updated special report: "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so just click here and get your copy today.

Add AT&T to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.


Read/Post Comments (3) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2013, at 5:35 PM, neamakri wrote:

    I have owned some (T) for over three years. I calculate the current payout ratio at 71% based upon analysts estimates for earnings this year. Please check your data.

  • Report this Comment On February 17, 2013, at 5:44 PM, TMFGalagan wrote:

    @neamakri - Capital IQ uses trailing earnings to calculate payout ratios. I confirm your number if you use forward earnings instead.

    best,

    dan (TMF Galagan)

  • Report this Comment On February 18, 2013, at 10:08 AM, cloggervic2 wrote:

    By buying back the Baby Bells, ATT has gone a long way towards reconstructing its former monopoly. In some areas it is the only suipplier of phone, internet and wireless, and it it continues to attempt to acquire more, e,g, the abortive attempt to acquire T-mobile. Also, they treat there customers really rudely and roughly as a result of the customers having no option. The FCC is failing big time to ensure competition.

    Therefore I think there is a political risk that ATT will be broken up again by some future government. However, that may not mean a loss for investors. I donlt know how investors fared the last time, but if it was done fairly, they probably came out real well as the Baby Bells boomed.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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