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AT&T Stock is Still a Dividend Machine

After digging through AT&T Inc.s (NYSE:T ) quarterly earnings report, my overall thoughts on the company were once again confirmed; share price appreciation will continue to be minimal moving forward, but AT&T stock may still deserve a spot in your portfolio simply because of its 5.7% dividend yield.

AT&T Stock: Earnings Report

The good news for AT&T stock is that earnings per share came in at a loss of 77 cents, but when adjusted for one-time items, EPS hit a positive 55 cents, beating estimates by a penny and scoring 2 cents higher than the same quarter last year.

Revenue jumped to $34.4 billion, topping estimates of $34.3 billion and the $33.1 billion AT&T reported last year. AT&T stock will also benefit from 2 million new wireless customers and 854,000 contract subscribers added during the quarter.

The not-so-good news was that increased competition within the industry hurt AT&T earnings during the quarter, causing profit margins to fall from 42% to 36.7% in a year. Customer defections rose to 1.22%, up from 1.11%, and postpaid average revenue per user dropped 10.7% on a year-over-year basis.

AT&T Stock: Moving Forward

AT&Ts management expects EPS to grow in the low-single digit rates, but believes margins will increase. Furthermore, CEO Randall Stephenson believes the companys revenue stream will be completely different after its DirecTV  (NASDAQ:DTV ) and Nextel Mexico  acquisitions. Management stated it will revise guidance for 2015 after the DirecTV deal closes; many believe that will happen in the second quarter.

As AT&T earnings growth rates have been minimal over the last few years and until we see how the DirecTV deal affects things, it is safe to assume growth will continue to be minimal. The share price multiple is unlikely to expand in the coming months, which will likely cause AT&T stock to just slightly grow in coming months or even years, as it has in the past.

Over the past five years the share price is up 29% while the S&P 500 has risen 86%. But, when we add AT&Ts dividend into the picture, AT&T stock returns dramatically jump to 76% compared to the markets 86% return over the last five years. When we look back 10 years, AT&T easily beats the markets 73% return with a 135% return.

For years, dividend-loving investors have adored AT&T for its high yield, but now with 10-year bond rates less than 2%, more traditional income investors have poured into safe-high-paying dividend stocks such as AT&T stock. The current yield of 5.7% is just too much to resist.

This recent influx of investors has drawn more attention to AT&Ts free cash flow, a primary driver of dividend growth and its overall safety.

Luckily though, management understands demand for AT&T stock depends on its dividend and in an effort to help free cash flow the company has reduced capital expenditures in 2015 by $2 billion. Additionally, many have begun to speculate that the DirecTV acquisition will help increase free cash flow, which will further help reduce the dividend payout ratio.

Bottom Line

In the short term, the slow growth and minimal share price appreciation makes AT&T stock look like a poor investment. But, when you consider AT&T is an extremely safe blue-chip stock, combined with its high-yielding dividend and managements commitment to protecting the dividend, its hard to see how investors can go wrong with owning AT&T stock.

As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities.