A dividend aristocrat can be defined as S&P500 Index constituents that have increased their dividend payouts for 25 consecutive years or more. Many dividend aristocrats have significant economical moats such as branding power or shifting costs, which makes them able to beat their peers year after year. Finding a dividend aristocrat which trades a fair value isn’t very common, at least not in this expensive market.
In this article, we will present two high yielding dividend aristocrats trading at prices even under fair value. The stocks we shall look at is AT&T (NYSE: T) and Verizon Communications (NYSE: VZ). Both companies operate within the telecom business which is a very matured market where there is little growth and the establishing costs are simply too high for other companies to enter. Also, both companies can be seen as a substitute to a bond investment, but with a higher yield than what most bonds can offer. But, the true value in both investments is the potential for juicy capital appreciating if the stocks revert back to the historical prices.
This company shouldn’t be new to readers here on Library for Smart Investors. We have written about this company several times, but we have never taken a deep dive into valuations to show you why this company seem so attractive to us now. By using valuation tools offered by F.A.S.T Graphs, we can find interesting information.
As we can see, the normal P/E for AT&T is 15.3, but the stocks trades at a P/E at 11.1. Should the stock trade at the historical prices then the price ought to be $47.68. This means a $12.43 price gain and a capital appreciation at 35.26%. By including the dividend return, the total return for this stock, if it reverts back to the mean, should be 39.38%.
Patient investors will be well reward for their patience because AT&T’s dividend yield is very high at 5.7%, beating any bond investment in the market. As of now, AT&T, which is often thought of as a boring non-growth stocks, is actually a value play with considerable potential for capital appreciation and a very promising total return.
Verizon Communications (NYSE:VZ)
This company shouldn’t be new to readers here on Library for Smart Investors either. Verizon Communication was mentioned in our article “6 High-Yielding Stocks to Buy in 2018” and the value potential is still there. Again, by using valuation tools offered by F.A.S.T Graphs, we can find interesting information.
The historical P/E for VZ is 15.6, but the stocks trades at a P/E at 12. Should the stock trade at the historical prices then the price ought to be $67.34. This means a $19.76 price gain and a capital appreciation at 41.53%. By including the dividend return, the total return for this stock, if it reverts back to the mean, should be 45.16%.
The dividend yield is also very high. Verizon Communication’s pays patience investors a yearly 5.0% dividend and operates with a credit rating similar to AT&T, namely BBB+.
The main issue for both stocks is that the market is very matured, and the debt/capital is also quite high for both companies. The main bear case is maybe the recent rumors about a merger between T-Mobile (NYSE: TMUS) and Sprint (NYSE: S). If the merger happens, both AT&T and Verizon might meet increased cost pressure which again leads to lower margins. Investors would be wise to follow this merger closely and pay attention to what both companies say about this recent news.
Disclaimer: The author owns shares in AT&T