1 Ultra-High Yield Dividend Stocks I’d Rather Buy

By | December 19, 2023

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Altria (NYSE:MO) And AT&T (NYSE:T) are two big names for many dividend investors, and it’s no mystery why. While both stocks lag the S&P500 over the past five years, they have offered two of the highest dividend yields in the index.

While Altria has a 9.3% yield at recent prices and AT&T is a few steps behind at 6.7%, I think there are three reasons why it is trailing against AT&T.

1. AT&T has major trends on its side

Smoking in the US has been on the decline for some time. In 2005, approximately 21% of American adults smoked tobacco; in 2021 this had fallen to 11.5%. For Altria, the nation’s largest tobacco company, volume growth has felt the impact. In the third quarter, the company reported that U.S. shipping volume fell 11.6%.

Fortunately for Altria, its pricing power has offset the volume decline over the years. The addictive nature of nicotine means that people typically don’t stop buying tobacco just because its price has risen. But at some point the company will need a solution that doesn’t just raise prices.

I think it’s hard to know when that will be for Altria consumers, but at some point the company will need a viable revenue stream in addition to its tobacco products. It has made attempts to adapt to the market by selling its own e-cigarettes, but most of those products have been discontinued with little to no success.

Although Altria is experiencing volume issues, AT&T’s customer growth is moving in the right direction. With the expansion of 5G coverage in the US and the growth of fiber optic internet, AT&T has two core businesses that should see good growth in the coming years. According to Ericsson — which just signed a five-year, $14 billion deal with AT&T — 5G will account for about 71.5% of the U.S. mobile market by 2029. Fiber optic is also only available to about 40% of Americans, so there’s plenty of room to go.

2. AT&T has made debt reduction a priority

When AT&T decided to pursue its media and entertainment (M&E) ambitions, it had to take on a lot of debt to make it happen. In retrospect, I think AT&T and its investors agree that its M&E activities were among the worst in its history – likely topped by the $85 billion acquisition of Time Warner, which closed in 2018.

Things have improved since WarnerMedia was spun off for $43 billion in early 2022. In the first quarter of 2022, AT&T reported $180 billion in long-term debt. It has since reduced that total to $138 billion (as of September 30). That’s still a lot of debt, but the company’s free cash flow has given it plenty of room to be aggressive with debt repayments in the coming years.

T Total long-term debt (quarterly) ChartT Total long-term debt (quarterly) Chart

T Total long-term debt (quarterly) Chart

T Total long-term debt (quarterly) according to YCharts

In the third quarter, AT&T reported free cash flow of $5.2 billion, up $1.4 billion year over year, and raised full-year free cash flow expectations to $16.5 billion. This should help the country reach its target of net debt/adjusted EBITDA in the range of 2.5 in 2025, up from 3.22 in the third quarter of 2022. Altria’s was 2.1 at the end of the third quarter of 2023.

Altria has much less long-term debt than AT&T (just under $24 billion), but its business is heavily dependent on it, as you can see in this comparison of the two companies’ debt-to-asset ratios.

T Debt to assets (quarterly) chartT Debt to assets (quarterly) chart

T Debt to assets (quarterly) chart

T Debt to assets (quarterly) data according to YCharts

3. AT&T’s valuation gives it a little more upside

AT&T appears to have put its recent troubles behind it – maybe not completely, but investors can see better days ahead with its recent performance.

Altria still seems to have a lot of questions about how effective it can be at diversifying away from cigarettes and competing in segments like vaping. It doesn’t help that the failed Juul experiment, which cost it more than $12 billion, has led to more skepticism.

At recent prices, AT&T is valued at about six times its free cash flow, while Altria is valued at just under nine times, making the former more valuable in my opinion. Add to that the fact that AT&T appears to have a clear plan, and I believe this has more long-term benefits than Altria.

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Stefon Walters has no positions in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Forget Altria: 1 Ultra-High Yield Dividend Stocks I’d Rather Buy was originally published by The Motley Fool

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