Hear more about Buffett's one and only Tech holding, join our Conference Call at 2pm CT Wednesday July 23rd. HIDE

Entire Div-Heavy Sector’s Overpriced – Name It

This is part of a YCharts series analyzing dividend-payers across all 10 sectors of the S&P 500. The first in our series showed readers how to find dividend stars and focused on healthcare stocks. Subsequent articles focused on dividend stars among consumer defensive stocks, utility stocks, financial stocks, industrial stocks, consumer cyclical stocks and energy stocks.

Along with the utility sector, the fat yields delivered by telecoms have been alluring candy for the income minded. Just take a look at AT&T’s (T) rising PE ratio as its 4% dividend yield has seemingly been irresistible to yield seekers.

T PE Ratio TTM Chart

T PE Ratio TTM data by YCharts

Value is mighty hard to come by in a sector where the forecasted 19.3 average PE based on 2013 earnings estimates is more than one-third higher than estimated level for the entire S&P 500.

Using YCharts screener to drill down into the Telecom sector only Century Link (CTL) and AT&T managed to have a dividend yield of at least 2%, a five-year annualized dividend growth rate of at least 3% (the sector median) and a forward PE ratio no higher than the 19.3 average for the sector. Honestly, neither stock looks all that compelling.

Century Link has a 5.8% current dividend yield and AT&T’s is a robust 4.7%. But income investors might want to curb their enthusiasm.

CenturyLink indeed scaled the low dividend growth hurdle for the sector. But that dividend growth screen covered the past five year; in mid February CenturyLink announced an about face and slashed its dividend by 26%. The dividend cut sure looks like righting the ship after miscalculating on its ability to generate enough earnings and free cash to cover a big 2008 hike.

CTL Dividend Chart

CTL Dividend data by YCharts

Century Link management also announced it authorized $2 billion in share repurchases. But repurchases are a squishy commitment as management can choose not to repurchase shares no matter what is authorized. Dividends are a bigger commitment, and the cut does not bode well for investors.

As for AT&T, it’s forward PE ratio of 15.2 is half the level of its trailing 12-month PE. Analyst earnings estimates are banking on a near 8% increase in earnings this fiscal year.

T EPS Estimates for Current Fiscal Year Chart

T EPS Estimates for Current Fiscal Year data by YCharts

Over the past five years, AT&T hasn’t exactly given investors an earnings trajectory to bank on.

T EPS Diluted TTM Chart

T EPS Diluted TTM data by YCharts

Bottom line in this sector is that you can pocket nice fat yields, but only at a price.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

Read more articles about: Investing Ideas  

blog comments powered by Disqus
Advertisement

Search Articles

Subscribe to YCharts Analysis

Advertisement

{{root.upsell.info.feature_headline}}.
Upgrade to {{root.upsell.info.tier_name}}. Start your {{root.upsell.info.tier_name}} Membership

{{root.upsell.info.feature_description}}

{{root.upsell.info.is_upgrade ? "Upgrade Now" : "Start My Free Trial"}}

Already a {{root.upsell.info.tier_name}} Member? Sign in here.