AT&T: Limited Dividend Growth For This Dog Of The Dow

AT&T (T) is one of the dogs of the Dow, which is a strategy designed to pick ten stocks offering the highest dividend yields from the Dow Jones Industrial Average. Under this strategy, an investor who purchases these stocks should outperform the market benchmark on a total return basis. The telecom industry in the US is characterized by companies that boast high dividend yields. AT&T recently announced that it will increase its quarterly dividend to 45 cents per share, which roughly translates into a dividend yield of 5.4%, based on the current share price of $33.20. In the rest of the report, we will discuss the company's cash flow position and the sustainability of its high payout.

The stock is up 10% on a YTD basis, however, we believe that much of this appreciation has been brought about by investors seeking a stable dividend. Based on its multiples, the stock is overvalued. T is trading at 13.5 times its forward earnings while historically it has traded at 11x. Moreover, on a price to sales basis, the stock looks expensive with a multiple of 1.5x, at a premium to Sprint's (S) 0.5x and Verizon's 1.1X. With shares trading at the current level, investors seeking growth should wait for a better entry point. Read more about this