In the midst of the coronavirus pandemic and the ensuing economic lockdown, many well-established dividend-paying stocks have been under duress. Old business models have been strained by shelter-in-place and work-from-home orders, and by now it's a foregone conclusion that global recession is here.
Nevertheless, many of these dividend stocks are in better shape than they may appear to be. Three that I own and plan to buy more of are AT&T (T 0.15%), STORE Capital (STOR), and Chevron (CVX 1.72%). Let's take a closer look at these three companies and see if they might be right for the dividend-focused portion of your portfolio.
1. AT&T: Mobile networks are more important than ever
If ever there was an imperfect telecommunications stock, it would be AT&T. In fact, some flaws could be considered major grievances. Shifting away from its bread-and-butter mobile network service, the company racked up massive debt purchasing DirecTV in 2015 and Time Warner in 2018, leaving it with a heaping $164 billion in long-term liabilities at the end of its first quarter of 2020.
Image source: Getty Images.
The problem compounds when you consider that DirecTV has been bleeding subscribers because of the cord-cutting movement and migration to streaming TV, the Warner Media segment is losing ad revenue from sporting events being canceled, and movie theaters are shuttered until at least the summer. AT&T has been experimenting with direct-to-consumer movie sales with the box office all but eliminated at the moment, and has a streaming service of its own, HBO Max, on the way. But all told, total revenue fell 4.5% in the first quarter, and the company had to ax its share repurchase plan to conserve cash.
As ugly as it looks, though, the mobile telecom business remains on solid footing and notched a 2.5% and 9% increase in service revenue and operating income at the beginning of the year. And in spite of headwinds working against its media business, free cash flow (what's left after cash operating and capital expenses, and from which dividends are paid) was $3.9 billion. Total dividends paid in the quarter were $3.7 billion, close to eating up all of the spare cash, but it's a situation that will be mitigated by cost cuts and the aforementioned elimination of share repurchases.
Simply put, while this is no growth story, shares tumbling 25% so far this year have the stock currently yielding 7.2% a year. With its primary mobile network services a staple -- even during the pandemic crisis -- AT&T is ideal for investors seeking income.
2. STORE Capital: A way to ride the real estate rebound
Businesses that relies on in-person interaction have been clobbered by COVID-19, and that is no more apparent than in the real estate industry. STORE Capital -- which focuses on single-tenant commercial buildings with long-term lease agreements -- has been hit especially hard. Units of the real estate investment trust (REIT) have been more than halved in value so far in 2020.
While it owns a diverse portfolio of more than 2,500 properties and no single customer makes up more than a low single-digit percentage of income, some two-thirds of STORE's real estate is rented out to the service sector. Spaces including restaurants, movie theaters, family entertainment venues, early childhood education centers, and health clubs comprised about one-third of rental income in 2019. With many of those businesses outright closed or operations heavily restricted at the moment, it's no wonder STORE's share price has fallen precipitously.
However, while the dividend payout (currently good for 7.5% a year) may need to be adjusted at some point, STORE is in better shape than it gets credit for. The company's properties were nearly 100% occupied at the end of March, almost 70% of April rent and interest payments had been collected, and nearly all those rents remaining negotiated deferred payments that included higher interest, lease payment escalation, or lease term extensions. That's a good sign that a recovery is in the works.
CEO Christopher Volk told me he is optimistic about the long-term prospects for the industries STORE services, and the company remains committed to managing its portfolio for the long term (rather than making drastic changes based on what has already happened). STORE has the financial strength to stick to that plan. Its debt-to-equity is one of the lowest among its commercial real estate peers, and the company had enough liquidity on hand to cover two and a half years' worth of 2019 operating and interest expenses. This is a solid bet on an eventual real estate recovery, and the dividend payout only sweetens the deal along the way.
3. Chevron: A household name that's here to stay
Chevron is one of the largest energy companies on the planet, but not even it has been immune to the economic lockdown and (brief) oil price war between Russia and Saudi Arabia in March 2020. After writing down $6.6 billion due to asset impairment at the end of 2019, Chevron's Q1 2020 got off to a rough start with operating income falling 8% due to lower energy prices. It's likely going to get worse in Q2 as oil remains in a slump while the world grapples with COVID-19.
However, the company has stated that maintaining its dividend is a top priority. Share repurchases have been suspended to conserve cash, capital spending on new projects has been cut, and asset sales have been made to shore up the balance sheet, leaving the energy giant in good shape to weather the storm. The capital-intensive nature of the industry means Chevron's total debt sat at $32.4 billion at the end of March, but cash and equivalents were $8.5 billion. Put simply, the company has some wiggle room.
And what of the dividend? A total of $2.4 billion was paid out to shareholders in Q1, but free cash flow was only $1.6 billion. It's not a sustainable situation to say the least, but cutting capital expenses (which totaled $3.1 billion the first three months of the year) will do the trick, giving the company time to ride out the current dismal energy price scenario.
But it's ultimately Chevron's ability to generate positive cash even in a less-than-ideal environment, and its deep pockets, that makes this a solid income investment. Shares are currently yielding 5.8% a year. Though it looks precarious at the moment, Chevron is still in good shape -- especially considering many of its smaller peers are at risk of folding right now. I like this oil major's chances of surviving and thriving once the crisis abates.
