Billionaire investors don’t necessarily need quarterly payments from dividend stocks to cover their day-to-day expenses, but they buy them anyway. That’s because businesses that distribute a portion of their profit to shareholders tend to outperform businesses that haven’t made such a commitment.
History says buying dividend payers can help your portfolio outperform the broad market. Between 1973 and 2023, dividend-paying stocks in the benchmark S&P 500 index delivered a 9.17% average annual return. That’s more than double the rate of return from non-dividend-payers in the same index.
With expectations of above-average returns, hedge funds run by billionaires are buying up AT&T (NYSE: T) stock left and right. In the first quarter, Steven Cohen’s firm, Point72, added about 15.3 million shares of the stock to its portfolio. Jim Simons passed away in May, but the firm he managed, Renaissance Technologies, bought 3.9 million shares of AT&T in the first quarter.
Shares of AT&T are down by about 37% from a peak they set way back in 2019. Should you follow the lead of billionaires and scoop up the beaten-down telecom stock? To answer that, we’ll need to understand why it’s down.
Why AT&T stock is down
AT&T slashed its dividend payout in 2022 to compensate for the spinoff of its underperforming media assets. In addition to a smaller overall operation, wireline phone and internet subscribers have been leaving in droves. Over the past two years, first-quarter business wireline revenue declined by 14% to $4.7 billion.
Until recently, AT&T’s total number of broadband connections had been steadily declining. Since the first quarter of 2022, the number of non-fiber-optic broadband subscribers fell by about 31% to 5.2 million in the first quarter of 2024.
Can you remember the last time you felt compelled to buy a better smartphone? Neither can many AT&T customers. First-quarter equipment sales have declined by about 9% over the past two years.
How AT&T could outperform for everyday investors
Shares of AT&T offer a juicy 5.9% yield at recent prices. The company hasn’t adjusted its payout higher in a while, but it probably will soon. The telecom giant generated a whopping $21.9 billion in free cash flow over the past year but used just 37% of that sum to meet its dividend commitment.
I don’t think that new generative AI features will drive demand for pricey new smartphones, but we’ll probably keep breaking and misplacing the ones we already have at a steady rate. It’s probably safe to assume declining equipment sales will reach a bottom.
AT&T spent heavily on 5G infrastructure investments, but they’re starting to pay off. Last year, the company launched a fixed-wireless broadband service for customers who don’t live near a fiber optic cable but still want to upgrade their internet speed. Total broadband connections bottomed out just before AT&T launched its fixed wireless service last year, and they’ve been rising steadily ever since.
AT&T is one of just three U.S. companies with a nationwide 5G network. They’re so expensive to build that investors can reasonably expect the company to maintain its position in America’s telecom oligopoly for the long run.
A buy now
AT&T is managing a large debt load. In the first quarter, its net debt fell to 2.9 times adjusted EBITDA. By this time next year, management expects net debt to fall to 2.5 times adjusted EBITDA.
The company hasn’t made any explicit promises, but there’s a strong chance AT&T will begin announcing annual dividend payout raises once it achieves its debt reduction goal. Adding some shares to a portfolio to hold long-term looks like a smart move for most investors.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Billionaires Are Buying Up Beaten-Down AT&T Stock. Should Dividend-Seeking Investors Follow Their Lead? was originally published by The Motley Fool
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