At this moment AT&T's stock yields 5.2% and Dow gives you 5.5.%. Now, admittedly, you aren't getting the yield you got just two weeks ago because the stocks have gone up.
But I always preach don't reach for yield, don't try to get a few extra pennies in dividends if the underlying companies aren't doing well.
Until the last four days I was concerned that you were stretching on both of these. But then I interviewed Dow CEO Jim Fitterling last week and made it clear that costs are way down while prices for key chemicals are either bottoming or trying to go higher. No matter, the free cash flow is far better than I thought possible and the earnings before interest, taxes and depreciation way more than cover the 70 cent quarterly distribution.
Several years ago I had the privilege of interviewing Paul Singer of Elliott Management, a terrific investment firm that takes big positions and then offers to help management bring out value. Not that long ago it snapped up $3.2 billion in AT&T stock and suggested a comprehensive plan to bring out shareholder value. AT&T's stock under current CEO Randall Stephenson has underperformed the S&P 500 by some 100%. It was about $38 when Stephenson took over. It's there now. Verizon (VZ) , on the other hand, has gone from $40 to $60.
Way too many companies tell Elliott they like their plans and then ignore them. Others just say we want nothing to do with your plans.
In this case, though, Stephenson, I believe wanting to preserve his legacy as a winner not a loser, seems to have gone all in with Elliott. By following Elliott's plan, AT&T could achieve $4.50 to $4.80 a share which should bring the stock up to $60. Stephenson is going to do a full portfolio review as Elliott wants, including a possible transaction involving Direct TV which is still losing customers but at a less frenetic pace. The chairmanship and the CEO will be split for greater accountability.
With everything on the table I think that AT&T can continue to deliver modest dividend growth that so many of you want while paying down a huge amount of debt that was taken on to buy Direct TV and Time Warner.
Now I know both of these are challenged. I had been openly arguing, for example, that Dow because it makes plastic, is never going to be bought by millennial managers. But one look at the deck from the company's quarter shows you that plastic may be more environmental than you think given all the energy and chemicals and trees it takes to make the alternative. Plus the company is making an all out effort to make plastic out of recycled fibers.
AT&T? It did lose 1.4 million pay TV customers this quarter although Stephenson said the losses are bottoming. What matters to me is not only will they cease making acquisitions, they will not start to delever with dispositions. Plus, tomorrow AT&T unveils HBO max, a streaming service, to compete with so many others, like Disney+ (DIS) and Apple TV+ (AAPL) along with NBC's Peacock (CMCSA) . It won't be out officially until the spring, but it's the first sign that the acquisition of Time Warner could produce some solid growth, not just cash flow.
Either way, in an era where bonds offer so little - 1.80% on a 10 year isn't much to write home about, Dow and AT&T offer you a twofer: high yields and a chance for growth.
Both are worth buying; some here and some if the Fed says the wrong thing Wednesday, whatever that is, and the employment number shows a surprise drop, a sign that perhaps the pro-business president might be in trouble for more than just Ukraine, whatever that is, too.