Time to Buy This Dow Darling Now?

You’d have a hard time finding a list of the top ten dividend yielding stocks on the Dow that did not include AT&T (NYSE:T), with a current dividend yield of 4.94%.  The share price is up 24.19% year to date but has dropped 5.52% over the past month.  So is it time to BUY the stock, or should investors WAIT and SEE or STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

AT&T has lost the competitive advantage of exclusive rights to the iPhone but the company does have some potential catalysts going forward, albeit not very explosive ones.  The first is a real long shot with the new Windows Phone 8 in the Nokia (NYSE:NOK) Lumia line.  Windows based smartphones get very positive reviews but have failed to catch the eye of a tech-crazed population more interested in the “smart” part and less interested in the “phone” part.  In short, phone quality and reliability, which many tech gurus feel is best on Windows Smartphones, is of little concern to techies and non techies alike, hungering for the latest and greatest apps.

Right now the Android and Apple lineup has the decided advantage of tablet computers within the same ecosystem.  If the release of the Windows 8 based tablet Surface catches on, interest in the Nokia phones could follow.

H = High Quality Pipeline

The new products familiar to consumers come from manufacturers like Samsung, but behind the scenes AT&T has a long history of innovation in platform technology that supports these devices.  The company prides itself for its relatively new Innovation Pipeline, or TIP, which they characterize as a giant “corporate suggestion box” where AT&T employees around the world offer their ideas for new products and product enhancements.

E = Equity to Debt Ratio is Close to Zero

While AT&T’s debt to equity ratio is on the high side of zero at 0.42, it is far superior to that of its only major competitor and fellow Dow component Verizon Wireless (NYSE:VZ) whose debt to equity ratio is 1.41.

T = Technicals on the Stock Chart are Strong

As of October 16, the stock price was 5.43% below its 20 Day Simple Moving Average, or SMA; 4.66% below the 50 Day SMA; and 6.84% above the 200 Day SMA.  The Relative Strength Indicator for T right now is around 24.9.  The traditional view of the RSI is an upper threshold of 70 indicates the stock is overbought and due for a drop in share price and the lower threshold of 30 signals oversold conditions with a share price rise as a possibility.  More conservative investors use 20 and 80 as the limits.  Depending on your point of view, T is already oversold or may be in the near future.

S = Support is Provided by Institutional Investors & Company Insiders

At 89%, AT&T has one of the highest percentages of institutional holders of any Dow component.  Verizon has 55% institutional ownership.  The top five holders of AT&T are Vanguard Group, Evercore Trust, Capital Research Global Investors, Bank of New York Mellon, and T.Rowe Price, and Fidelity Investments.

E = Earnings Are Increasing Quarter over Quarter

Although AT&T’s quarter over quarter earnings increased 10.08%, over 5 years earnings per share are down 18.8%.  Verizon shows a similar but slightly better pattern with 12.63% earnings growth quarter over quarter and a 14.71% loss over 5 years.

E = Excellent Relative Performance to Peers

In reality AT&T has only one peer and both are doing well, although on some measures T lags a bit behind VZ.  Return on Equity from Verizon is 7.05% compared to 4.08% at AT&T.  Operating margins for VZ of 12.73% also best the 7.98% margins at T.  On book value per share AT&T comes out ahead at $17.79 versus $13.04 and T’s forward P/E of 13.81 is more attractive than VZ’s 15.77

T = Trends Support the Industry in which the Company Operates

While AT&T will certainly continue to lose landline subscribers, they are at the forefront of the mobile/wireless explosion and they have room to grow with their Internet/TV Uverse business.  They lag behind rival Verizon in expanding 4G network capabilities and are looking to close the gap.  With mobile subscriptions approaching saturation levels in a few years, major growth will come from increasing data consumption as more and more subscribers will be using smartphones and tablets to access Internet services.  AT&T is already the largest high speed Internet Service Provider in the US.

Finally, if a duopoly between AT&T and Verizon becomes reality margins at both these giants will improve.  It is for that reason the proposed acquisition of T-Mobile was not approved and now there are other causes for concern.  Second tier player Sprint-Nextel (NYSE:S) is getting a large chunk of cash from a 70% ownership bid from Japanese mobile operator Softbank.  In addition, the proposed merger of T-Mobile and MetroPCS (NYSE:PCS) may delay the duopoly awhile.

Conclusion

Although the industry will continue to evolve and mergers and acquisitions will shake the landscape a bit, it is hard to envision a scenario that does not include AT&T as a major player.  To some Verizon may be a more attractive play, but it was AT&T that recently announced an additional $11 billion dollar share buyback program, which is good news for its investors.  Couple that confidence in their own performance with an already attractive dividend, and T looks like a definite BUY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.