As a stock, AT&T (T 1.02%) mostly gets attention these days because of its outsized dividend yield. With its 6.9% yield, there are plenty of investors willing to give it a closer look in hopes of capturing what they believe is a guaranteed return.
But it's when investors take a closer look at the company and the stock that they reveal the full AT&T investment picture. That picture illustrates at least three things investors need to know before buying this stock.
1. AT&T's dividend looks relatively safe
With a 6.9% yield, many investors might worry that AT&T's dividend is on the verge of being cut. A good rule of thumb for evaluating the average dividend payout is that, once a dividend yield rises about 5%, more caution (and more research) is required before making a buy.
But a closer look at AT&T's financials show that the telecom giant is well situated to cover the dividend checks it's writing. Over the past 12 months, AT&T paid its shareholders $8.1 billion in dividends. Over that same time frame, it generated net income of $11.3 billion and free cash flow of $19.8 billion.
With AT&T paying out less in dividends than its profits (assessed in two different ways), it's well set up to pay its dividends as long as it can maintain the status quo of the business.
2. AT&T's revenue growth is minimal
AT&T is not what anyone would consider a growth stock, as its best quarter over the past four has been 1.5% year over year growth.
T Revenue (Quarterly YoY Growth) data by YCharts
This concerns many investors, as AT&T will have difficulty growing its dividend if it isn't increasing its revenue. At the same time, AT&T must control its operating expense growth so its margins don't slip. If these expenses rise faster than revenue, the dividend could get squeezed and need to be cut.
Fortunately, AT&T has done a great job of spending responsibly, so its operating expenses haven't increased.
But operating expenses don't account for AT&T's biggest problem: Its debt. Interest expense is a massive line item on AT&T's income statement, as its balance sheet has nearly $140 billion in long-term debt. While AT&T hasn't issued any debt recently, if it does, the lack of growth could also cause AT&T to cut the dividend.
AT&T may not need to grow its revenue much to maintain the dividend, but no growth is a precarious place to be as an investor.
3. AT&T has been a long-term stock market loser
The last thing to know about AT&T before investing in it is how underwhelming an investment it has been in comparison to the broader market. Total return accounts for both the stock price movement and dividends paid and is a metric dividend investors must consider.
Over the following time frames, AT&T stock has done little to nothing to benefit investors when compared to the S&P 500. The 10-year return looks particularly terrible, especially when compared to the S&P 500's 204% return in the same period.
| Total Return | 1 Year | 3 Years | 5 Years | 10 Years |
|---|---|---|---|---|
| AT&T | (9.5%) | (6.7%) | 5.3% | 28.5% |
| S&P 500 | 14.9% | 31.6% | 85% | 204% |
Data source: Ycharts. Returns are as of Nov. 28, 2023.
So, at the end of the day, most smart investors are avoiding AT&T. The stock hasn't performed well over the long term and isn't growing. If you're examining the stock for the dividend alone (and don't care if your initial investment loses value), then AT&T may have some potential. However, there are much better ways to create near-guaranteed income, and investing in the S&P 500 is one of them.
