Motley Fool: Dividends and growth

You might think that stocks trading with low price-to-earnings (P/E) ratios would be out-of-favor investments, but that’s not the case with AT&T (NYSE: T), the top wireless carrier in the United States. Ma Bell, which recently sported a forward-looking P/E ratio near 11, had a big year in 2019, with its shares soaring by 40%, on a split-adjusted basis.

Speaking of dividends, the stock recently yielded a hefty 5.4%, and the company has increased its payout annually for 36 consecutive years. Over the past 12 months, it spent just 51% of its free cash flow on its dividend, too, leaving plenty of room for future increases.

AT&T’s bounce is a combination of the market appreciating the things that the telco giant is doing right (including its steadily growing wireless business and the upside of the Time Warner assets it acquired in 2018) instead of focusing on its fading DirecTV satellite television, legacy wire-line segments and long-term debt of $153.6 billion – mainly incurred from its purchases of DirecTV, Time Warner and AWS-3 spectrum licenses.

AT&T expects its free-cash-flow levels to remain stable as it cuts costs, divests noncore assets, streamlines its digital efforts and merges its services into cost-effective bundles. Exciting catalysts for the stock in 2020 include the rollout of 5G on the wireless front and the launch of the HBO Max premium streaming service.

Ask the Fool

Q: I may never get around to mastering all the math needed to figure out if a company is over- or undervalued. Are there any shortcuts? – G.H., online

A: First, understand that while there are lots of calculations that might lead you to be confident of a stock’s intrinsic worth, that worth will still be an estimate. A handful of smart stock analysts are likely to come up with different numbers for any company they study because they all make divergent assumptions, such as the company’s growth rate.

That said, one simple measure is the price-to-earnings (P/E) ratio, which divides a company’s stock price by its annual earnings per share (EPS). A low P/E ratio suggests a low valuation, though it’s often best to compare a company’s P/E ratio with those of its peers and with its own five-year P/E range.

An even rougher approach is to look at market capitalization, or market value, which represents the total value of all of a company’s shares outstanding. Tesla, for example, recently had a market cap of $92 billion – more than Ford’s $36 billion and General Motors’ $51 billion combined. If that sounds unreasonable to you, given your expectations of the other companies’ futures, you’d consider the company to be overvalued.

Q: Where can beginning investors like me learn about upcoming initial public offerings (IPOs)? – H.L., Collierville, Tennessee

A: New investors should steer clear of IPOs. Even seasoned investors might want to avoid them – at least for their first year or more on the public markets.

Newly public companies tend to be quite volatile at first. University of Florida professor Jay Ritter has found that on average, IPOs underperform the market in their first three years.

My dumbest investment

My dumbest investment moves of the past decade were selling my shares of Microsoft at $33 and my shares of Take-Two Interactive Software at $15. The lesson I learned? Don’t sell good companies, stupid. – M.J.J., online

The Fool responds: With Microsoft shares recently trading near $166 and Take-Two Interactive shares near $129, those sales are understandably painful – in retrospect. But think back to before you sold them. What was your reasoning? Did you expect much less growth from them? Did they seem rather overvalued? Had you found much more promising investments into which to move your money? Those can be good reasons to sell a stock, so don’t kick yourself if any of them applied.

Sometimes it can be hard to distinguish good companies from bad ones. If you don’t research your holdings and keep up with their progress, you’ll have trouble assessing their quality and growth potential, and you can end up selling promising stocks that have plenty of room for growth.

Microsoft has a lot going for it now, with more than 35 million subscribers to its Office 365 software and solid growth in its cloud computing offerings. Take-Two Interactive has multiple blockbuster games on its hands, including the Grand Theft Auto and Red Dead Redemption franchises. If your research suggests these companies have promising futures, you might buy back into them to benefit from further gains.