AT&T Hikes Dividend, Risks Remain

Investing in telecom stocks seems risky as the global market faces the threat of yet another recession. While we await a political resolution to the Euro-zone sovereign debt crisis, the contagion is spreading globally, weighing on economic growth. The problems in Europe are swelling and spilling over to the rest of the world and might even stall the slowly moving U.S. economy.

In the ongoing turmoil, dividend-paying stocks appear safe investments. These stocks must necessarily have strong financials and the companies should have the ability to invest further for new developments. In this regard, we believe this is the right time to buy telecom stocks paying higher dividends as these companies would emerge stronger when the economy recovers.

Let us move to AT&T Inc.’s (T - Analyst Report) investment consideration and dividend analysis, which is currently the hot pick in the entire telecom sector.

The second-largest U.S. mobile service provider hiked its annual dividend by 2.3% to $1.76 per share, reflecting its strong commitment to deliver increased returns to its shareholders. AT&T will now pay a quarterly dividend of 44 cents compared with 43 cents paid this year. This marks the 28^th consecutive year of dividend hike. Last year, AT&T increased its annual dividend twice, bringing it to $1.72 per share.

The new dividend will be paid on February 1, 2012 to shareholders of record as of January 10, 2012. The new annual payout of $1.76 represents a dividend yield of 6.1%. This is higher than its key rival and the largest U.S. mobile service provider Verizon Communications Inc. (VZ - Analyst Report), which raised its annual dividend by 2.6% to $2 per share in September, reflecting a dividend yield of 5.20%.

AT&T distributed $7.6 billion and $9.9 billion as dividends to its shareholders in the first nine month of this year and fiscal 2010, respectively. By comparison, Verizon paid dividends of a respective $4.1 billion and $5.4 billion in the first nine months of this year and fiscal 2010.

Other telecom service providers such as CenturyLink Inc. (CTL - Analyst Report), Windstream Corporation (WIN - Analyst Report) and Frontier Communications (FTR - Analyst Report) currently offer high dividend yields of 8.2% 8.6% and 15.20%, respectively.

The dividend hike reveals AT&T’s solid financial position, with a healthy balance sheet and growing free cash flows. Strong yields and continued profit generation notwithstanding, we believe AT&T is an unsafe stock to invest in as the company is battling its ambitious $39 billion takeover of T-Mobile, announced in March. AT&T plans to take a $4 billion charge in the fourth quarter against the takeover, which has heightened risks of failure.

We are maintaining our long-term Neutral recommendation on AT&T. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.

Read the full analyst report on T

Read the full analyst report on CTL

Read the full analyst report on WIN

Read the full analyst report on FTR

Read the full analyst report on VZ