AT&T Inc. (NYSE:T) was once considered a dividend aristocrat but has now fallen from grace. While some people still hold onto their AT&T shares, it’s important to understand the current state of the company. In this article, we will explore the reasons why AT&T is struggling and provide alternatives in the form of high-yielding dividend aristocrats that offer better investment opportunities.

The Good News: Analysts Are Bullish on AT&T’s Prospects

Despite its struggles, there are some positive signs for AT&T. Analysts are more bullish on the company’s prospects, projecting a 3% to 4% growth for a stock that already yields almost 8%. This could potentially lead to long-term returns of 11% to 12% if the valuation remains constant.

Furthermore, there is an upside potential of 150% within two years, with the possibility of 50% annual returns. This kind of return potential is remarkable and comparable to Warren Buffett’s best trades.

AT&T is currently trading at 5.8X forward earnings and 6.4X cash-adjusted earnings. This pricing suggests an expectation of -4.2% annual growth perpetually, according to Ben Graham’s formula. However, AT&T is projected to experience significant subscriber growth, potentially reaching 261 million subscribers by 2027.

While these positive projections may make AT&T seem like an attractive investment, it’s crucial to consider the reasons why it may not be a wise choice.

Why I Won’t Recommend AT&T At Any Price

There are several key reasons why I am hesitant to recommend AT&T as an investment:

1. AT&T’s expected rise in subscribers is primarily driven by pre-paid subscribers, rather than more profitable post-paid ones.
2. Average revenue per user (ARPU) is expected to decline by 4% for post-paid subscribers over four years, indicating a reduction in pricing power.
3. Analysts anticipate only a 1.9% annual growth in dividends through 2028, with minimal stock buybacks.
4. AT&T’s debt burden and the expectation of steadily increasing borrowing costs pose significant risks in a rapidly evolving industry.

Additionally, the upcoming 6G battle with Verizon and T-Mobile in the 2030s is expected to be costly for AT&T, further straining its balance sheet. The bond futures market predicts a long-term borrowing cost of 6%, reflecting higher interest rates for AT&T indefinitely.

Considering these factors, it becomes clear that AT&T may not be the best investment option for long-term growth and dividend returns.

More Reasons to Avoid AT&T

When evaluating potential investments, I follow two fundamental investing principles:

1. The market is typically right in the long term, reflecting a company’s true value based on factors such as moatiness, management quality, cash flow predictability, and brand power.
2. Dividend stocks should provide both regular income and long-term growth in principle value, adjusted for inflation. Anything less may indicate a value trap.

Applying these principles to AT&T reveals that the stock has not generated significant returns for buy-and-hold investors over the past 30 years. Adjusting for inflation and considering dividend reinvestment, AT&T has significantly underperformed compared to alternatives such as Johnson & Johnson or the S&P 500. This indicates that AT&T may not be a prudent long-term investment.

Consider These 9%-Yielding Dividend Aristocrats Instead

If you are seeking high-yielding dividend aristocrats that offer better growth potential and superior management, consider these alternatives:

Altria Group, Inc. (MO):

Altria offers an 8.6% yield, exceptional dividend safety, and has a proven track record of steadily growing dividends. With an overall quality rating of 98% and a credit rating of BBB+, Altria presents attractive long-term growth potential, outperforming both AT&T and the S&P 500.

Enbridge Inc. (ENB):

Enbridge boasts an 8.6% yield and substantial dividend safety. As a non-speculative investment grade, non-speculative REIT, Enbridge is well-positioned for reliable income and long-term growth. With an overall quality rating of 98% and a credit rating of BBB+, Enbridge presents a compelling opportunity for investors.

Both Altria and Enbridge not only offer higher yields but are also undervalued by approximately 30%. These dividend aristocrats provide significant long-term return potential, making them attractive investment options.

Ultimately, when it comes to investing in dividend stocks, it is important to consider the potential returns, creditworthiness, and management quality. By avoiding AT&T and exploring alternatives like Altria and Enbridge, investors can position themselves for higher returns and greater wealth accumulation.