InvestorPlace’s Brett Kenwell recently suggested that AT&T (NYSE:T) was a good buy at $32. Although Brett views the 6% yield on T stock as very attractive, he believes investors interested in buying the company’s stock can get a better entry point in the low $30s.
I’m not a fan of T stock primarily because of its debt. However, any time you can buy a stock for less, I think you should try to do so.
Kenwell argues that despite having $167 billion in debt — most of which was added to buy Time Warner — the cash flow the content creator delivered to AT&T more than makes up for the additional leverage.
And let’s not forget once more that juicy 6% yield — a dividend payment that has been increased for 35 straight years — makes America’s largest wireless carrier an income investor’s dream stock.
I’m here to say that investors should never buy AT&T stock for its 6% yield. Here’s why.
Can You Do Better?
Of the 505 S&P 500 stocks (that includes dual classes), AT&T has the 10th highest dividend yield according to Finviz.com. Currently, AT&T’s debt represents 68% of its market cap.
I would argue that if any of the nine S&P 500 stocks with a higher yield than T stock have less debt as a percentage of their market cap, you ought to at least consider those stocks if you are focused on income rather than capital appreciation.
After looking at each of the nine stocks possessing higher dividend yields, none of the stocks are in any better shape from a debt perspective than AT&T. Occidental Petroleum (NYSE:OXY) would have been if not for its pending $57 billion acquisition of Anadarko Petroleum (NYSE:APC) adding $30 billion in debt. Its debt post-acquisition will account for more than 100% of its market cap, although it does plan to sell some non-core assets to bring down leverage.
So, at least from a higher yield perspective, you can’t get an S&P 500 stock that delivers a better yield without sacrificing the quality of cash flow, etc.
However, if you include all stocks with a market cap of $2 billion or higher, I’m confident you could find a stock with a stronger balance sheet. According to Finviz, 195 stocks have a dividend yield of 5% or higher. I found a couple of examples that fit the bill.
Example # 1: BCE
Being from Canada, I just had to pick a Canadian stock.
BCE (NYSE:BCE), one of Canada’s largest media companies, currently yields 5.1%. At the end of March, it had $21 billion in short and long-term debt, which represents 50% of its current market cap of $41.5 billion.
It is very similar to the new AT&T in that it also has a media division that owns TV and radio stations, cable networks, and Pay TV channels. It’s one of Canada’s most successful content creators.
Although it can’t hold a candle to Time Warner in terms of both the amount of content and the revenue generation, it does provide its wireless and landline businesses with excellent opportunities for cross-promotion.
Is it worth giving up 90 basis points of yield for significantly less debt?
If you’re an income investor, I think it is.
Example # 2: Kohl’s
This second example, if you’re a current AT&T shareholder, will probably make you laugh, but that’s okay. I’m not here to evaluate the merits of which sector is a better investment. I’m merely pointing out stocks with better debt profiles that have a high dividend yield.
I’m speaking about Kohl’s (NYSE:KSS), the value-priced department store with more than 1,100 locations in 49 states. Sure, retail’s still got a lot of weakness, but overall, I think the future remains positive despite the brick-and-mortar store closures over the past two years.
As I write this, Kohl’s dividend yield is 5.6%, 40 basis points less than AT&T. However, its $1.9 billion in debt is only 24% of its current market cap of $7.8 billion. Its yield is higher than usual due to a 21% decline in its stock price year to date through July 10 (a 27% drop including dividends).
While Kohl’s can’t hold a candle to AT&T’s cash flow, it generated $1.9 billion over the trailing 12 months through May 4, despite a 3.4% decline in its same-store sales in the first quarter and a 2.9% decrease in overall revenues.
Despite the unusually slow start to its fiscal year, Kohl’s expects earnings per share of at least $5.80 in fiscal 2019, a forward P/E of just 8.3.
From where I sit, Kohl’s provides an attractive dividend yield with better upside potential than AT&T.
The Bottom Line on T Stock
As I said in the beginning, I’m not a fan of AT&T because of its debt.
However, if you own it merely for the dividend yield, you might want to reconsider your reasoning. Owning a stock for its yield alone is never a good idea.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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