Is AT&T the Best Dividend Stock?

Ishtiaq is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I love dividend stocks, and always remain in search of a perfect dividend stock. Dividend stocks have performed better historically than stocks with no dividends. Furthermore, dividend stocks provide a regular stream of income for investors. Historical low yields on bonds have played an important role in turning investors towards dividend stocks, and income investors have found some stable companies that provide them income during these testing times. Dividend paying companies are usually big, stable companies with piles of cash to distribute to investors. As a result, these companies do not provide the excitement and thrill of sharp price movement and volatility.

Furthermore, price movement in these stocks is more predictable and stock price follows a more normal upward trend. The telecom industry is one of the best dividend payers in the market. There are a lot of companies in this sector that pay attractive dividend yields. However, some of these companies are walking a tight rope in terms of dividend stability. I do not recommend stocks which I believe will not be able to maintain dividends in the long-term. As a result, I have decided to talk about AT&T, Inc (NYSE: T)

AT&T is one of the best dividend paying stocks in the telecom sector. At the moment, the company pays an annual dividend of $1.80, yielding 5.12%. Although the yield is not a blockbuster like some its peers, it is not disappointing either. Companies like Frontier Communications (NASDAQ: FTR) and Windstream Corporation (NASDAQ: WIN) offer dividend yields much higher than that of AT&T; however, these companies are always in danger of cutting dividends. We do not want to add such companies to a portfolio.

AT&T generates massive amounts in cash flows from operations. For the trailing twelve months, the company has generated over $36 billion in operating cash flows. However, the company is also spending heavily on network expansion. Over the same period, AT&T has spent $19.12 billion on capital expenditures. As a result, free cash flows for the company stand at over $17 billion during the past twelve months. AT&T capital expenditures will remain flat during 2013, and cash flows from operations are expected to increase substantially. As a result, free cash flows for the company will increase during 2013.

Trailing twelve months cash dividends stand at $10.3 billion, which takes its payout ratio based free cash flows to around 60%. There is still considerable room for the company to grow its dividends. Furthermore, an improvement in free cash flows over the next twelve months should allow the company to increase its dividends.

Data usage is on the rise in the U.S., and the company is increasing its network to exploit this lucrative market. At the moment, AT&T controls a major portion of the market with its main competitor Verizon Communications (NYSE: VZ), while Sprint Nextel (NYSE: S) enjoys a small portion of the market. AT&T and Verizon are the biggest players in the 4G LTE market, and both companies are trying gobble up the market share. AT&T will significantly improve its revenues by taking advantage of 4G LTE market. As a result, I believe revenue growth will be solid for the company. Furthermore, a decrease in capital expenditures should leave more cash to be distributed to the shareholders.

Conclusion

AT&T is a massive operator and the company enjoys a certain advantage in the market. As a result, it has considerable pricing power, which ensures that the company will have solid revenue growth. In addition, there is substantial room in the free cash flows of the company to increase its dividends in the future. AT&T offers a healthy yield with a considerable growth opportunity in dividends. I believe AT&T will be a great addition to any income portfolio. The dividends are set to continue for the foreseeable future, and I expect the company to raise dividends on a regular basis.  


IshtiaqAhmed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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