AT&T Is Still A Mess, So Buy These 9%-Yielding Dividend Aristocrat Bargains

AT&T Inc. () is a fallen dividend aristocrat whose quality has fallen so low that it is no longer on our list. But many people on Seeking Alpha, and even a few of our members, still own it, so each quarter I update AT&T to see if the dumpster fire is still burning.

I have good and bad news to share about AT&T's dumpster fire and two amazing 9% yielding (on average) dividend aristocrat alternatives. Names you can trust in good times and bad, unlike AT&T.

Good News: Analysts Are More Bullish On AT&T's Prospects

3% to 4% growth for a stock yielding almost 8%! That's 11% to 12% long-term returns if the valuation never improves.

Wow, 150% upside potential within two years and 50% annual returns! That's not just Buffett-like return potential. That's Buffett's greatest-trade-ever return potential.

• AMEX during the Salad Oil scandal, 50% annually for four years.

AT&T is trading at 5.8X forward earnings and 6.4X cash-adjusted earnings.

That's pricing in -4.2% annual growth forever, according to Ben Graham's formula.

AT&T is expected to see big gains in subscribers, climbing from 217 million total subscribers to 261 million by 2027.

And here's the bad news. I don't trust AT&T with my money and recommend you don't, either.

Why I Won't Recommend AT&T At Any Price

First, the reason AT&T's subs are expected to rise is due to pre-paid subscribers, not the profitable post-paid ones.

Average revenue per user, ARPU, is expected to fall from $49.60 in 2022 to $48.7 in 2027.

That's a tiny 4% decline, so who cares? Remember that all these numbers in companies' reports aren't adjusted for inflation.

• -15% inflation-adjusted decline in ARPU for post-paid subs over four years.

OK, but maybe AT&T is going to fight Verizon (VZ) for market share on price? Nope, they are expected to have 71 million post-paid subs still.

The 15% reduction in real pricing power is just a decline in AT&T's competitive position. Its non-wide moat is expected to get even shallower.

Some good news? Analysts expect free cash flow to grow 50% by 2028 to $21 billion. The bad news? Don't expect that to translate to cash returns to shareholders.

• Consensus dividend growth through 2028: 1.9% annually
• Buybacks? $1 billion per year by 2027 = 1% of market cap.

AT&T doesn't have stock-based comp data available, but here's what management makes.

Were AT&T's executives worth $69 million last year? Given the horror show returns investors have suffered for DECADES, I would think not.

But the point is that AT&T is expected to pay off a lot of debt in the coming years, not reward investors with buybacks or faster dividend growth.

Why? Because while AT&T's average interest rate is 4.1%, its 7-year bonds are trading at 7.3%. That's the yield that a brand new 7-year bond would go for if AT&T had to issue one.

For a stagnant business, a lot of debt with higher for longer rates that result in steadily higher refinancing costs could be the kiss of death.

Because guess what's coming in the 2030s? The 6G battle with Verizon and T-Mobile. That will be very expensive, and AT&T needs a balance sheet to handle a world where its borrowing costs might never fall below 6% again.

According to Bank of America, the global 6G network wireless market will be worth $1.77 trillion by 2035. The 6G market is expected to be $1.58 billion in 2028, and grow at a CAGR of 103.35%" - IBD.

The bond futures market predicts that AT&T's long-term borrowing costs will be 6%.

• 50% higher interest rates for AT&T forever.

I'm sure that some people will pump AT&T and Verizon as 6G plays, but in reality it will be a giant money pit. That's why analysts expect 2% dividend growth to continue, so that when big telecom starts investing in 6G starting in 2029 and 2030 the dividends will remain safe.

More Reasons I'll Never Recommend AT&T

I fundamentally believe two things.

First, the market is always right long term. As Ben Graham said, in the long term, the market is a weighing machine that always "weighs the substance of a company" correctly.

The good, bad, the ugly. The moatiness, the management quality, the corporate culture, the predictability of the cash flow, and the brand power. The IP patents and R&D efficiency.

The market, over 10+ years, through millions or even billions of people buying and selling, will determine historical fair value for a stock, with 90% to 97% statistical certainty.

And what if a stock doesn't make money for 10+ years? Then, there is a 90% to 97% statistical probability that a company is just a bad business, and there is no reason to buy it.

When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” - Warren Buffett.

If a stock you bought at fair value or better hasn't made money in 10 years (including dividends), there is a 90% chance you want to sell and move on.

If a stock hasn't made money in 30 years? There is a 97% probability you should dump it immediately, crying "From hell's heart I stab at thee." ;)

The investing rule of thumb two: good dividend stocks should be like real estate.

Your dividends are your rent.

And the value of your principle should grow over time, adjusted for inflation.

Anything less is a value trap.

AT&T? It's been a value trap for over 33 years because remember that these numbers don't factor in taxes.

• Factoring in taxes, AT&T would have lost you 2.1% per year since 1990 had you taken dividends in cash.
• 50% decline in the buying power of your original $1,000.

I'll show the exact table proving this in a second and why I'm using 1990 as a time frame (it's when the historical data for one of the 9% yielding aristocrat alternatives begins).

But let me show you something that's absolutely incredible.

This covers 2019 to 2028, almost a decade with essentially no earnings growth.

If an oil company ten years ago was riding high on $100 crude, and we're in a recession ten years later, and crude has crashed? Sure, then maybe there will be no EPS growth for a decade.

But 90% of the time, a company that doesn't grow in a decade is bad. It is not necessarily a bad company, just a bad company to invest in.

Is the only accepting of zero growth being OK? If the yield is 10+% and you can earn market matching or better returns from pure yield, that's safe.

Can I lock in a 13% yield on a blue chip with zero growth but a stable business and strong balance sheet? Then I'll potentially beat the Nasdaq on pure dividends, and who cares about growth?

But how many companies offer that? None that I know of.

And take a look at this.

AT&T's 10-Year Total Return

For 10 years, you bought and held this venerable aristocrat and reinvested all your dividends. Then it cut its dividend and you kept the faith! After 10 years, you enjoyed no actual higher standard of living from dividends and you are now down 21%.

• 90% probability AT&T is a fundamentally bad stock to own long term.

AT&T's 20-Year Total Return

For 20 years you didn't take a dime in dividends, you paid your average 20% taxes on those dividends and just bought more AT&T stock, rain or shine.

And after half an investing lifetime? You've made a real return of...61%.

• 2.4% annualized real return = same as risk-free treasury bonds!

And remember you didn't actually get to buy anything with those dividends other than more AT&T stock.

Had you invested in Johnson & Johnson (JNJ), you'd have twice the real wealth.

Had you bought the S&P 500 (SP500) you'd have even more.

And had you bought Lowe's (LOW), you'd have 4X the inflation-adjusted wealth.

• 91% probability it's better to own bonds than AT&T.

AT&T's 30-Year Total Return

For 30 years, an entire retirement time period, you kept the faith in Ma Bell and DRIPed all your dividends. You paid taxes on those dividends and after 30 years you made...77% real returns.

• 1.9% annualized real return < risk free T-bills (2.4%)
• 97% probability Tbils are better than AT&T long-term.

JNJ is hardly an exciting stock. It's just as close to a fundamentally risk-free stock as exists on earth. And had you bought JNJ instead of AT&T and reinvested those dividends you'd have 8X more money after 30 years.

Lowe's? You'd have 25X more money.

AT&T's 38-Year Total Return

38 years and you made 18X your money! Finally, we have proof that AT&T is a good investment...if you wait an investing lifetime.

Yay! You made 6X your money after inflation and it took just four decades!

• 5% real return = 2X Cash! All hail Ma Bell!

Let's ignore the fact that JNJ would have delivered 8X the real wealth of AT&T with a lot lower volatility.

Let's ignore that the S&P would have tripled the returns of AT&T and Lowe's would have gotten you 26X better returns and turned $1 into $137 adjusted for inflation.

How about this?

What If You Spent Your AT&T Dividends?

In 1985, you invested $1,000 into AT&T. Then you spent all your dividends, funding your retirement.

You received $15,000 in dividends over 38 years, ($5136 adjusted for inflation and paid about $3,000 in taxes.

So you got $12,000, or $4,109 in post tax inflation-adjusted dividends and now your principle is worth $927 (adjusted for taxes).

AT&T has managed to lose money for buy-and-hold investors for decades.

And guess what? You can buy even higher-yielding, much faster-growing dividend aristocrats that are much better managed that have made investors rich and are 80% likely to keep doing it in the future.

Finding The Best 9% Yielding Dividend Aristocrats Alternatives To AT&T

Here is how I have used our Zen Research Terminal to find the best 8% yielding blue chips to buy no matter what happens next with the economy.

From 504 stocks in our Master List to four 5+% yielding non-speculative investment grade, non-speculative REITs.

All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.

• non-speculative
• dividend champions list
• 7.9+% yield (AT&T 7.8%).

Here, I've sorted by yield and provided some of the most valuable fundamentals we track (out of 60 fundamental metrics).

I've linked to articles that provide a full guide to the investment thesis and risk profile.

Fundamental Summary:

• yield: 8.6% (5X S&P 500)
• dividend safety: 100% very secure (1.0% dividend cut risk in a severe recession)
• overall quality: 98% low-risk Ultra SWAN dividend aristocrats
• credit rating: BBB+ stable (6.3% 30-year bankruptcy risk)
• long-term growth consensus: 4.8%
• long-term total return potential: 13.4% vs 10.2% S&P 500
• discount to fair value: 30% discount (very strong buy) vs 10% overvaluation on S&P
• 10-year valuation boost: 3.6% annually
• 10-year consensus total return potential: 8.6% yield + 4.8% growth + 3.6% valuation boost = 17.0% vs 10.1% S&P
• 10-year consensus total return potential: = 381% vs 160% S&P 500.

Suppose you bought AT&T and are down 20%, 30% or even 40%. That means you must wait for AT&T to go up 25% to 67% to break even.

Or you could buy ENB and MO and potentially almost 5X your money in a decade.

Do you think AT&T is more likely to double in a few years? Or ENB and MO? Two Ultra SWAN aristocrats who have kept growing steadily as management has promised? Or AT&T, famous for broken promises, missed guidance, and zero real returns for a quarter century.

Historical Returns Since 1990

AT&T has been a lot worse investment than its nominal returns over the last 33 years.

Adjust For Inflation, AND What If You Took Your Dividends In Cash?

(Source: Portfolio Visualizer Premium.)

Ignoring dividend taxes entirely, AT&T has lost you money on your original investment had you taken your dividends in cash (as many retirees do).

Altria has paid out $79,000 in dividends per $1,000 investment, an incredible 79X your investment. The original $1000 has increased in value, even adjusting for inflation of 142% over the last third of a century.

Enbridge has been almost as good of a grower as the S&P 500, growing your original $1,000 investment by 351% adjusted for inflation while paying out $50,000 in dividends.

• 50X your money back in cash (pre-tax), and you've more than quadrupled your investment.

AT&T income growth 7% annually = 52% yield on cost.

Enbridge 15% = 443% yield on cost.

Altria 17% = 627% yield on cost.

Consensus Total Return Potential Through 2025

• if and only if each company grows as analysts expect
• and returns to historical market-determined fair value
• this is what you will make.

AT&T

S&P

Enbridge

Altria

Bottom Line: AT&T Remains A Hot Mess, Consider These 9%-Yielding Dividend Aristocrats Instead

Is there any reason to buy AT&T? Sure, the cash-adjusted P/E is 6.

If you ever wanted to buy a stock for 6X earnings, cheaper than Shark Tank deals, then you can buy AT&T today.

Will you likely lose money long term? Probably not. AT&T's dividend isn't unsafe, and even with no growth or P/E expansion you could expect about 8% returns.

Enbridge and Altria don't just offer much higher return potential but even yield more today!

You might argue with analyst forecasts for 5% growth for ENB (management guidance too) or 5% growth for MO (management guidance as well).

But there is no questioning those fat yields averaging almost 9%.

And it's not like ENB or MO are overvalued, or even just fairly valued.

They are 30% undervalued, approaching Buffett-style "fat pitch" territory.

In fact they offer almost 400% total return potential over the next decade, nearly 3X more than the S&P 500.

Theoretically AT&T is about 50% undervalued...if it grows as expected in the future.

Theoretically AT&T offers the same 400% total return potential over the next decade.

But when it comes to dividend cutters vs dividend aristocrats and kings? All I can say is that Wall Street is all about long-term probabilities, and I always go with the high-probability math.