Upcoming Dividend Increase For AT&T: Is This High Yielder Still A Buy?

It is the usual practice of AT&T (T) to increase the dividend during the first several weeks of December. This year should be no exception and the amount of the dividend increase should roughly equal the past two years' amount. The street guess is for a 1 to 1.5 cent per share increase pushing the yield above 6% based on current prices. This article will examine the current valuation of the shares for investors.

AT&T is the largest telecommunications company in the United States offering land, wireless and internet services through out the country.

One of the keys for dividend investors is the yield level of shares and the future earnings and dividend growth rates. In the case of AT&T the company is expected to grow both in the 2-4% range for the next several years. With growth rates at levels around the historical annual inflation rates, investor should be able to maintain their investment in today's value.

The following chart (click on all charts to enlarge) shows the dividend and PE ratio for the shares since 1983. The current yield, while not as high as the early 1980's is in the upper boundaries of historical yields, making the shares a decent income purchase at current prices. The PE lies in the lower levels of historical levels as well. The shares are attractive by both levels of yield and PE, but neither are at rock bottom levels.

The following chart shows the cash flow of the shares compared to the current dividend payment. The cash flow is quite adequate to fund the dividend payments since it is over three times as much as the dividend payment.

The shares however are not a bargain when compared to the market as measured on a relative basis against the S&P 500. The red line below shows the relative PE that is now located in the upper levels of its historical range. Whenever the relative PE is below 0.75 the shares are at the best value. Levels above 1 usually signal an over valued situation that often precedes price declines. Clearly, it is more advantageous to buy shares when the relative PE is 0.75 or less and not when the ratio is above 1.

Conclusion: The shares represent a good high yield but do not promise future growth in earning or dividend increases much above 3%. The relative PE signals overvalued shares. However, the current yield above 6% coupled with the expected upcoming dividend increase offers investors a very attractive yield.

Disclosure: I am long T.