The Motley Fool: AT&T stock offers solid income

AT&T (NYSE: T) is not a perfect investment: The company has a high debt load and primarily operates in the increasingly competitive wireless industry. However, it has been around as long as the telephone itself and is in no danger of collapsing now. Proposed lower taxes and a business-friendly environment in the U.S. should provide a tailwind for profits.

AT&T’s recent dividend yield of 4.7 percent is much higher than the overall stock market’s average yield, and it has room for further growth. It has hiked its dividend annually for more than three decades.

In addition to being a rock-solid income generator, AT&T is becoming a growth engine again, too, with its acquisition of DirecTV and its proposed takeover of Time Warner (which isn’t guaranteed to be approved). Bundling its pay-TV, wireless and broadband internet services gives the telecom giant tremendous leverage in delivering media content across multiple platforms – especially if it excludes that content from data charges across its own networks. If the GOP succeeds in lowering corporate tax rates, that will also help AT&T.

Analysts expect AT&T’s revenue and earnings to increase by 12 percent and 5 percent, respectively, this year. The stock seems reasonably priced, recently sporting a price-to-earnings (P/E) ratio near 18 – lower than its industry average of about 22. Even if AT&T’s stock grows slowly, it offers solid income. (The Motley Fool has recommended Time Warner.)

Ask the Fool

Q: What are “bulls” and “bears” on Wall Street? – L.W., Seattle

A: A “bull” is optimistic, expecting a particular stock or the whole market to go up. A “bear” is pessimistic, expecting a drop. No one can know what the market will do in the short term, but its long-term trend has been up, so we’re long-term bulls. Market crashes, wars and the Great Depression have all brought prices down, but the stock market has always recovered.

Q: What does it mean if a company pays out more in dividends per share than it has in earnings per share (EPS)? – M.D., Kinston, North Carolina

A: It’s a red flag, requiring more research. Imagine Buzzy’s Broccoli Beer (ticker: BRRRP), which has paid out $3 per share in dividends in the past year, but has an EPS of just $2 per share over that period. It may be sustainable for a while if it has a lot of cash on hand (which you can look up on its balance sheet), but no company would want to keep paying more in dividends than it’s generating in cash.

If Buzzy’s is just going through some temporary trouble, the discrepancy might not be a big deal. But if it’s facing long-term problems, the company might consider reducing or eliminating its dividend.

Remember, too, that earnings are not the same as actual cash generated. Due to various (legal) accounting practices, EPS can be manipulated. You’ll often get a better picture of how much cash a company is generating by studying its statement of cash flows.

To see a list of healthy and growing dividend payers we’ve recommended, take advantage of a free trial of our “Motley Fool Income Investor” newsletter at fool.com/shop/newsletters.

My dumbest investment

I’m not sure if it was really a bad investment, but it was definitely bad timing. I bought shares of US Airways on Sept. 7, 2001. Yes, four days before the 9/11 attacks.

I was bullish on the company. I flew a lot, almost always on USAir, where I got good service. It was rebuilding at the time, but 9/11 just killed it. The company soon filed for bankruptcy protection.

After 9/11, I was upset like everyone else, and I didn’t think much about the stock. When it went south in a hurry, I held on, never wanting to give it up. Bad idea. At least I didn’t lose a lot (comparatively speaking), as I already knew how to diversify. So I just lost about 10 percent of my portfolio. – C.F., Slidell, Louisiana

The Fool responds: You’re right that USAir, which later became US Airways, had struggled in the 1990s and fought its way back to profitability, only to suffer again in the post-9/11 world, as other airlines did. Several airlines went bankrupt (largely wiping out their shareholders), fewer routes were flown, more than 150,000 jobs were lost, the industry lost more than $50 billion, and airline stocks fell sharply.

US Airways eventually merged with America West and, later, American Airlines. Its prospects seem solid now, but the airline industry is a tough one, with challenges such as bad weather, volatile fuel prices, fare wars and empty seats.