As markets continue zig-zagging around, savvy investors would be wise to consider the numerous dividend plays that have been tossed into the bargain bin in my view. It's never easy to catch a falling knife with a significant amount of negative momentum behind it, as doing so could endanger investors who don't do the proper homework beforehand. Still, falling knives can offer rare opportunities for higher dividend yields and deeper discounts on stocks where the herd mentality has gotten it wrong.
In this article, we'll take a look at two falling knife dividend stocks that I believe are misunderstood by the broader market: Verizon (VZ, Financial) and AT&T (T, Financial). They have slowly and steadily crept lower month after month. While each of these companies has its own fair share of issues, both company-specific and macro-related, I'd argue that the market is misjudging them as selling pressure continues to snowball.
Betting against the herd with the out-of-favor, high-yielding blue chips
Sometimes, negative momentum is enough to squeeze certain investors out of a stock, even if no material news or fundamental changes warrant such selling. That's why it's important to stay confident in your own analysis of a company. Long-term investors should not concern themselves overmuch with short-term headwinds. In fact, conventional value investing wisdom holds that short-term price headwinds may be bargain opportunities if you still believe in the company's ability to grow.
I think both Verizon and AT&T fall into the category of short-term declines driven mostly by macro factors and over-selling. It's understandable as both are capital-intensive stocks in a rising interest rate environment. I think we're reaching a point where selling forces are perceived as more daunting than they actually are.
Verizon
Verizon is a telecom titan that's continued to struggle at the hands of the softening macro environment and stiff competition. Shares of Verizon sunk 3.65% on Thursday in sympathy with AT&T, which nosedived by a staggering 10.4% following a regettable quarter that saw revenue and cash flow come in short of expectations.
Verizon has been a contrarian pick in the telecom space for quite some time. The wireless behemoth lost its market dominance and has struggled to find its way back. Those who chased the stock solely because of the high dividend yield have since been punished. Today, the stock is at risk of returning to lows not seen in over a decade.
Unfortunately, Verizon may not have much going for it as it looks to turn things around. The company expects wireless revenue to grow just 1.5% this year. That's sluggish and down considerably from its fourth-quarter growth of 3.5%. The company's fixed-line business also looks to be a considerable drag on growth and margins.
Simply put, there are no easy solutions for Verizon. The 6.76% dividend yield and severely depressed price-earnings ratio of 7.35 are stars of the show. With such low expectations, I think it won't be hard for the company to outperform expectations down the line.
The risk/reward certainly is not bad overall in my view, even though the dividend commitment (51.1% payout ratio) is high, and the balance sheet is not as impressive as it used to be, with just $2.7 billion in cash and more than $180 billion in total debt.
AT&T
AT&T's pains grew on Thursday as the company missed analysts' estimates on revenue and free cash flow for its first quarter. Quarterly revenue came in at $30.14 billion, just a hair shy of the $30.27 billion estimate. So, why the massive plunge of more than 10%? The company noted that wireless demand and upgrades had taken a hit. As the recession develops, the company says there's a good chance that we could see demand fade further.
Undoubtedly, cash-strapped consumers will need to trim away at their budgets at an increasing rate as the economy decays. However, AT&T does offer an attractive 5.6% dividend yield, which may help dampen the blow of a recession until demand eventually picks back up again.
The current dividend seems safe and sound. It's hard to say if the stock is a bargain at around $17 per share given that it was not profitable last year, but I think last year's net loss is more of a one-off than the start of a longer-term trend. Ultimately, it depends on whether we're in for a soft or hard landing. In any case, AT&T trades for a price-book ratio of 1.44, which is absurdly low, even with all macro headwinds considered. The biggest knock against the company has to be its debt load. There's a whopping $164.4 billion of total debt weighing down the balance sheet.
Bottom line
Though nobody knows when the pain will end for AT&T or Verizon, I find the swelling dividend yields and compressing valuation multiples on each of these stocks very compelling. Even as the average analyst calls on Wall Street hover around Hold or Sell, I view these dividend play as worthy of consideration for their long-term recovery potential.
