Forget AT&T: Here Are 3 Better Dividend Stocks

AT&T (T 2.60%) is a very popular stock for retirees and dividend investors. AT&T's business is diversified across mobile, media, and technology, and this diversity is highly attractive to many. In addition, shares yield about 5.5% today and trade at roughly 16.5 times earnings.

That's certainly a solid yield, but some would argue that AT&T's sprawling business had become too bloated and distracted from its main wireless business. This was the core criticism that activist investor Elliot management expressed in recent months, and AT&T management has responded by committing to a comprehensive portfolio review while pausing on any major acquisitions.

Yet after the recent run, AT&T's stock may be running out of gas. The company still faces huge competitive threats in not one, but every single one of its main businesses, as the transition from 4G to 5G communications, and the migration from linear television to over-the-top streaming remain huge question marks for the telecom behemoth. A recent downgrade from a leading telecom analyst cast further doubt on the company being able to meet its 2022 targets.

So after AT&T's recent run, dividend-oriented investors may wish to look at other names that offer better total value and/or growth prospects. Here are three names to consider.

Image source: Getty Images.

CenturyLink

If you're going to invest in a risky, debt-laden telecom, why not go for the cheapest, highest-yielding of the bunch? However, there's more going on at CenturyLink than just its juicy 7% dividend yield.

CenturyLink is almost entirely focused on the wireline business, especially enterprise wireline, where it actually competes head-to-head with AT&T. Both companies have struggled here in recent years, as legacy technology services are declining more than newer, high-speed broadband services are growing; however, eventually the newer growth segments will outgain legacy services declines, returning each company to growth. Of course, when that happens is an open question.

So why invest in CenturyLink over AT&T? Namely, it's much, much cheaper, and by fully concentrating on wireline services under all-star CEO Jeff Storey, CenturyLink appears to be more efficient at the moment:

Data source: CenturyLink and AT&T third-quarter releases. Table by author. EBITDA = earnings before interest, taxes, depreciation, and amortization.

AT&T actually received $80 million from the sales of some patents in the third quarter, perhaps boosting revenue above its normal run rate. As you can see, CenturyLink is currently more profitable, and its profitability trajectory is improving to a greater extent than AT&T's, as CenturyLink continues to find cost synergies from its 2017 merger with Level 3 Communications.

Not only is CenturyLink outperforming in this segment, but it is much, much cheaper. In 2019, CenturyLink expects to make about $3.25 billion in free cash flow, which equates to just a 5 times price-to-free-cash-flow ratio at today's market cap. Meanwhile, AT&T recently guided for $28 billion in free cash flow in 2019, good for a forward price-to-free-cash-flow ratio of 10.

CenturyLink's dividend yield is also 120 basis points higher than AT&T's, even after cutting the dividend earlier this year by more than half. CenturyLink has been using the excess cash to pay down debt, paying off $1.5 billion of debt year to date, and refinancing even more of its debt at a lower rate. That brought the company's debt-to-EBITDA ratio down from 4.0 to 3.7 this year. AT&T is paying down debt too, but CenturyLink's leverage ratio is higher. That means continued solid performance, deleveraging, and lower interest rates have the potential to boost CenturyLink's stock price much more than AT&T's.

CenturyLink could be seen as more risky than AT&T, but at half the valuation, and without the uncertainty in the media and 5G spaces, its bargain valuation more than makes up for it.

Western Digital

After a big run this year, hard disk and NAND flash storage producer Western Digital (WDC 0.81%) has run into a buzzsaw in October after its third quarter earnings release. While a recovery in NAND flash is beginning to take hold, the recent progress has been slower than some expected. Additionally, Western Digital's CEO announced his retirement in conjunction with the company's earnings call, adding to the uncertainty. Since then, shares are off about 27.5% from their 52-week highs, but still up a healthy 35% on the year.

WDC data by YCharts

The pullback could be an opportunity for yield-seeking investors, as Western Digital's dividend yield has climbed to 4.2%. At just under $48, shares are still far lower than the highs of 2014, when shares were priced above $110.

Of course, 2019 has been a brutal year for memory stocks in general, as the "boom" of 2017-2018 led producers to increase the supply of chips, just before the U.S.-China trade war began, causing customers to pull back on demand, in turn causing memory prices to crash.

Nevertheless, the long-term future looks bright for memory and storage. NAND demand is set to explode at a long-term growth rate of 30% to 40% per year, as memory-intensive applications such as big data, artificial intelligence, and machine learning applications take off over the next decade.  Though it's not my favorite stock in the space, Western Digital still has a strong portfolio across both hard disks and flash, and should be able to find its way to the next memory upcycle, which seems like just a matter of time, barring a recession. Meanwhile, investors are getting paid a nice 4.2% dividend for their patience today.

KLA Corporation

Of the three AT&T alternatives in this article, KLA Corporation (KLAC 2.07%) is the highest-quality of the bunch, though it currently has the lowest dividend yield. Nevertheless, that forward yield climbed over 2% recently, as shares fell 7% following an analyst double downgrade from "buy" to "sell" on Thursday, Nov. 21, over fears that the stock had run too far in the near-term.

KLA has had an amazing run in 2019, having more than doubled since Jan. 1, and the downgrade appears to be mere caution after such a big move, with investors taking profits on the cautionary note. 

KLAC data by YCharts

Why all the previous optimism? KLA has the No. 1 market share and a large economic moat in process diagnostic equipment and services for semiconductor manufacturers. Its machines are essential in producing smaller, more powerful logic and memory chips. KLA's equipment has been in high demand this year as the world's leading foundries are seeing a surge in demand for 5nm and 7nm chips for 5G applications and high-performance computing. While certain industrial and automotive segments of the chip world are lagging, high demand for the most advanced leading-edge chips, especially from China, means more demand for KLA's equipment.

However, analyst Tim Arcuri of UBS thinks that foundry equipment buying has peaked in the near term when comparing today's buying patterns to past cycles. Arcuri moved his price target to $140 from $192, below today's share price of $161.

However, this may be more of a short-term call after a big run. The capital intensity of chip production is going up over time, so past cycles may not be a perfect comparison. And though foundry spending has been booming, memory spending has actually been in the dumps this year as memory prices have plummeted. That segment should turn around next year, offsetting a potential flattening on the foundry side. In addition, KLA has a strong services revenue base at around 25% of its revenue, which is not exactly tied to its quarterly equipment sales, and should help even out the cycles going forward.

Several other analysts actually came out in defense of the company after Arcuri's downgrade, with some giving price targets above $200 per share.  And taking more of a long-term view, KLA management guided for $14.50 to $15.50 in earnings per share (EPS) by 2023, meaning shares trade at only 10 to 11 times that figure today.

While the stock isn't quite as cheap as it was earlier this year, KLA still has a large moat in an industry, that, while cyclical, still has very attractive long-term prospects. That means Foolish long-term investors should strongly consider picking up shares today after the recent discount.