Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.
Purchases for my FI Portfolio should slow down over the next month or two, although I still currently have enough capital for one more purchase. Of course there's also future dividend payments coming in each month which will help to build up my capital and allow me to make regular purchases. The great thing about having a fairly sizable portfolio already is that I can expect it to churn out over $1,300 per quarter in cold, hard cash. I get to use that dividend stream for whatever needs I have, whether that's build up savings or capital for future investments. That's the definition of a snowball. It starts off slow but eventually it starts to pick up speed and just continue to churn out more and more dividends. I'm always on the lookout for opportunities to purchase high quality companies at solid long term valuations and have a few other companies in mind for potential candidates to add to my portfolio.
On March 25th I added shares to one of my oldest positions. I purchased 30 shares of AT&T (T) for $32.73 per share. After commission my per share cost basis came to $33.00. Based on the current quarterly dividend of $0.47 this lot will provide $56.40 in annual dividends and carry a YOC of 5.70%.
I originally purchased shares of AT&T back in November 2011 and had yet to add to my position. This was something I've been wanting to remedy and decided to finally take the opportunity to increase my exposure to T. There's still room for in my portfolio as it's currently constructed for me to add again but investment capital is a bit light currently and will continue to be so over the next month or two. Until then I'll try and be fairly tight with future investments. I now own 51.088 shares of AT&T at an average cost basis of $31.31 per share. With the current quarterly dividend of $0.47 per share my average YOC is an even 6.00%.
AT&T has several items that can spur on growth for the company, although the issue for investors is whether the changes can make a meaningful impact on the bottom line of a $170 B company. AT&T has been looking for expansion opportunities into higher growth markets, namely Mexico. Earlier this year AT&T already completed the acquisition of Iusacell and has announced plans to acquire Nextel Mexico. Both of these acquisitions offer great wireless growth opportunities as Mexico matures and its economy improves. An improving economy means more of the population will move into the middle class which should mean more wireless data consumption and cell phone use.
The big acquisition is DirecTV (DTV) which gives AT&T a much better growth component. DTV has been able to grow operating cash flow by 20.7% and free cash flow by 30.8% per year over the last 9 years. Assuming no synergies between operations and no growth of the cash flow for either this year and the dividend from AT&T would take up 75.5% of combined free cash flow. The DTV acquisition still isn't finalized so it's not a done deal yet and there could still be some possible divestment of some business segments in order to obtain approval. DirecTV has a lot of room for growth in both the domestic and the international markets, especially Mexico and Latin America.
Another growth opportunity is the connectivity in cars and the "internet of things". With more and more devices requiring wireless connections there's a big market for better and faster service. The following comment by Mike Clancy on a recent article about AT&T on Seeking Alpha gives a good explanation for possible ways AT&T can capitalize on car connectivity.
"Let me give you one easy example of the connected vehicles revenue potential, and I speak as a recently retired person that was actually working on this. Example: Joe and Mary commute to work together 5 days a week along a series of busy county/state roads, so do millions of other Joe's/Mary's each day across America. Along these roads are gas stations, car dealerships, Tim Hortons, McDonalds etc. Their gps system will be collecting and sending their travel information to "big data" systems run by T & VZ (mostly). The other players will be HP, IBM, and Microsoft with some second tier players. Joe and Mary will be directly marketed to while commuting, as well as when at home. Joe's newer Ford already needs brakes, and the Ford dealers along his commute route have been calculating the brake wear, and are about to tell Joe about a sale of brakes that is running over the next 48 hours. Everyone wins in this situation. The dealer in this example is able to develop a more intimate customer relationship, and better manage on-hand parts inventory (true just in time). Joe gets a heads-up on the status of his brakes, and gets a discount on repairing them, and every other retailer along their route can use targeted marketing directly aimed at each car/truck going down the road."
A big risk to AT&T for the long term is capital expenditures. As a quasi utility/technology company AT&T has to continually build out and update infrastructure. Another big risk is that announced acquisitions might not be completed or there could be problems related to merging operations.
There's also been price wars among the major domestic wireless carriers in an attempt to gain more customers on their networks. Any decrease in customers would be difficult to manage as the domestic market is fairly well saturated.
The debt load will also be quite high assuming all of the acquisitions are approved. A high debt level combined with high capital expenditures will stress cash flow.
Common valuation metrics like P/E ratio, P/B ratio, and dividend yield are all around the five year averages for AT&T. This suggests that shares are currently trading in line with recent valuations but aren't necessarily cheap, but shares also aren't necessarily expensive. On a forward P/E metric shares of T are looking relatively cheap at 12.8.
I also like to value companies with a Gordon Growth Model calculation. Based the current quarterly dividend of $0.47, a 8% discount rate, and 2% annualized dividend growth AT&T's fair value is $31.96. So my purchase price was at a slight premium to fair value. If dividend growth is able to improve on the 2% annual growth to just 3% the fair value would increase to $38.73.
My purchase of AT&T is more of a bird in the hand being worth two in the bush. AT&T probably won't provide stellar dividend growth but steady 2% annual growth combined with a high initial yield is fine. The high yield from T will provide dividends in my hand right now to reinvest into other securities that might offer better growth prospects.
The valuation isn't stellar but with several growth initiatives on board as well as expected cost savings once all acquisitions are fully integrated I expect AT&T has the opportunity to surprise to the upside over the next 5-10 years. With a generally overheated stock market as well AT&T should be a solid defensive holding that will provide an excellent dividend yield.
My forward 12-month dividends are up to $5,571.06. Total taxable accounts', Loyal3 and FI Portfolio, forward dividends are at $5,626.24.
I've updated my Portfolio page to reflect this addition.