AT&T yields over 5.5%, but you can easily double that dividend yield with this strategy.
AT&T had strong revenue, EPS and cash flow growth in Q3, and raised guidance.
It has beaten analysts’ estimates for the past four quarters, and has received 19 to 21 analyst upward EPS estimate revisions over the past 30 days.
We’ve been illustrating ways to create income from some non-dividend paying stocks in some of our recent articles for income investors, but this time around we’re focusing on ramping up the dividend from a range-bound dividend stock – AT&T, (NYSE:T).
AT&T is a company in transition – it has made several acquisitions this year, including the DirecTV deal, which closed on 7/24/15, and has already improved T’s revenues and cash flow. It also bought Mexican carriers Lusacell and Nextel Mexico in early 2015, which also helped it to broaden its revenue mix:
(Source: AT&T website)
AT&T hasn’t received much support from the market over the past year. Since the August pullback, it has traded in a narrow range of around $31.80 to just below $34.00. However, this makes it an interesting candidate for selling covered options, as you’ll see further below.
Dividends: T actually has an attractive dividend yield of 5.59%, and it typically raises its quarterly dividend by $.01 in January, (since 2009). But its dividend growth rate is pretty meager, at 2.38%.
You can track T’s current yield and yearly payout in the Telecoms section of our High Dividend Stocks By Sectors Tables.
Options: Since T isn’t a very volatile stock, and trades in a narrow range, it can work well for selling covered calls, which will allow you to effectively double your dividend with a short term, two-month trade.
We’ve added this January 2016 trade to our Covered Calls Table, which can give you more details about this and over 25 other trades.
The January $34.00 call strike pays $.48, very similar to T’s $.47 quarterly dividend. It’s $.38 above T’s price/share, which also leaves you some room for potential price gains.
Income Scenarios: By selling this call option, your quarterly yield goes from 1.40% to twice that, at 2.83%, in a two-month term, which = 9.14% annualized.
If T rises above $34.00 at or near expiration, or near the 1/7/15 ex-dividend date, your shares may get assigned/sold, in which case you would realize $.38 in price gains, and the $.48 in call option premium, for a profit of $.86.
If T doesn’t rise above $34.00 then, your profit would equal the $.47 dividend and the $.48 in call premium money.
A third possibility is that T rises above $34.00 after the ex-dividend date, and your shares would get assigned/sold after you’ve qualified for the dividend.
T’s options are widely traded and usually have strikes in $1.00 increments near its current stock price, so as it moves up and down in its range, there are often call option strikes pretty close to T’s price/share. The trick is to balance the amount of call premium money you would receive vs. the amount of the next dividend vs. the potential price gain amount.
Put Options: Unlike covered call sellers, put option sellers don’t receive dividends. However, if you’re looking for a lower breakeven for T, you could sell cash secured puts below its price/share.
This January $33.00 call strike pays $.66, a bit more than T’s $.47 dividend, and gives you a breakeven of $32.34, which is 1.7% above T’s 52-week low.
Our Cash Secured Puts Table will give you more details for this trade and over 25 others.
Earnings: Thanks to its acquisitions had major growth in Q3 2015. DirecTV, having only closed on 7/24/15, is still getting integrated, but has already helped T’s Entertainment and International segments. Management said that the 18.48% gain in revenue was largely due to this acquisition. “Our early integration efforts with DirecTV are going very well and we’ve just begun to scratch the surface on the video, wireless and broadband cross-selling opportunities.” (Source: T website)
Free cash flow had a huge rise of over 57%, which caused T’s dividend payout ratio to improve, dropping it to 57%, vs. 67% in Q2 2015.
Segments: The Business Solutions segment provided around 51% of T’s revenues for the first three quarters of 2015. Although the Consumer Mobility segment created only around 25% of the revenues, it contributed nearly 37% of operating income for this period:
Increased Guidance: The robust Q3 results led management to increase its guidance for revenue, EPS, free cash flow and capex.
(Source: T website)
Analysts: T has beaten analysts’ consensus EPS estimates for the past four quarters, and has received 21 upward EPS revisions for 2015 and 19 for 2016. (There are 22 analysts covering it.)
(Source: Yahoo Finance)
Valuations: After all of this good news, it’s a bit surprising that T is still trading fairly close to the bottom of its five-year P/E range. It also looks cheap on a price/book basis.
Financials: A mixed bag here, lower than average management efficiency ratios and operating margins, but a much lower debt/equity load.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only.