Over the long-term, owning stocks has been the best way to preserve and grow your wealth above the rate of inflation. As we've seen with AI stocks this year, stocks can certainly appreciate a lot in a short amount of time.
But while those fast-movers garner a lot of headlines, only 68% of all stock market returns since 1926 came from price appreciation, with the remaining 32% of all stock market returns actually coming from dividends, and the reinvestment of those dividends, according to research by S&P Global.
So not only are dividends attractive for their consistent payouts regardless of what the market is doing, they're essential to generating attractive long-term returns.
In addition, it's always interesting when a company initiates a dividend for the first time. That suggests management has achieved growth and strategic goals in the recent past, is confident in a stock's future earnings power, and is now beginning to reward shareholders.
The following two stocks just initiated dividends for the first time in recent weeks. And from the looks of it, both look screamingly cheap as well.
NASDAQ: TMUS
Key Data Points
The Un-carrier gets a little more like other carriers
Telecom giant T-Mobile (TMUS +0.44%) has long branded itself as the "Un-carrier," as the scrappy upstart challenger to dividend favorites Verizon and AT&T. The latter two, by virtue of their leading networks and duopoly, have long made handsome profits and paid out hefty dividends to their shareholders.
But T-Mobile, after taking market share with its lower prices and customer-friendly ethos over a decade, changed the game with its 2020 acquisition of fourth-place telecom Sprint, just as the 5G transition was happening.
The combined company has since leapfrogged both Verizon and AT&T in terms of 5G coverage, with a two-year lead. And customers are paying attention -- T-Mobile has managed to rack up impressive customer net additions all while completing the long integration of the T-Mobile and Sprint networks.
With that lead, T-Mobile is now taking share in new markets traditionally held by the "big two," including enterprise accounts and rural geographies. Meanwhile, T-Mobile's 5G wireless broadband product has seen rapid adoption since its nationwide availability in May 2022, reaching over 4.2 million customers already by Sept. 30, 2023.
As customers opt for premium plans and T-Mobile's integration spending declines, T-Mobile's free cash flow is inflecting upwards. Last quarter, T-Mobile's adjusted free cash flow exceeded $4 billion:
Image source: T-Mobile.
T-Mobile has a market cap of $171 billion as of this writing, so the stock is only trading at around 10.5 times last quarter's annualized free cash flow. Even for the telecom space, which generally has modest growth prospects, that's a cheap valuation. And if T-Mobile continues taking market share, it's incredibly cheap.
In addition to the company's ongoing share repurchase program, management announced it would initiate T-Mobile's first-ever dividend, with a $0.65 quarterly payout beginning in December and an ex-dividend date of November 30. That's about a 1.75% yield at today's price, but CEO Mike Sievert also said the company plans to grow that payout about 10% per year going forward.
Combined with still-ample share repurchases, T-Mobile looks like another outstanding defensive stock, now with a growing payout.
This industrial company just began a payout and is even cheaper
Industrial building supplier Atkore (ATKR 5.12%) is even cheaper than T-Mobile, trading at a mere 7.5 times earnings. Like T-Mobile, Atkore has also been repurchasing shares at a rapid clip, but it appears the market isn't giving the company much credit for its sterling operating performance over the past few years.
So in conjunction with its fourth fiscal quarter release last week, Atkore decided to initiate a quarterly dividend between $0.30 to $0.35, to be payable sometime in the first quarter of 2024. That's a dividend yield between 0.9% and 1.1% at these price levels. But that dividend should also grow handsomely in the years ahead, as a $1.30 annual dividend would amount to just a paltry 8% payout ratio, based on the midpoint of the company's forward guidance of $16.50 in EPS in FY 2024.
Of course, there's reason to think that guidance is conservative. After all, a year ago, Atkore guided for between $13.10 and $14.90 in EPS for 2023. But Atkore wound up posting $19.40!
While Atkore has been the beneficiary of elevated pricing over 2021 and 2022, that excess pricing is now normalizing. But in the past year, prices declined less than thought. Still, Atkore's recent forward guidance incorporates nearly all of its pricing benefit going away, counteracted by strong volume growth and fundamentals.
Atkore is a leading provider of plastic pipe and conduit, metal framing and cable management, electrical cable and conduit, and mechanical tubes, among other building products. Traditionally serving mainly the non-residential construction business, Atkore is now poised to benefit from the infrastructure, data center, and electrification buildouts from the large Federal bills passed in 2021 and 2022. That's why management has actually guided for double-digit volume growth in the year ahead, counteracting anticipated price declines.
At less than $130 per share as of this writing, that makes Atkore incredibly cheap. And thanks to healthy share repurchases and now a dividend, patient investors should do quite well in this industrial stock over time.
