Dividend Stocks

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AT&T, Phillip Morris - >>> 3 Stocks to Buy With Dividends Yielding More Than 5%


AT&T and two other stable blue-chip stocks continue to pay out big dividends throughout the COVID-19 crisis.


by Leo Sun

Sep 10, 2020


https://www.fool.com/investing/2020/09/10/3-stocks-to-buy-with-dividends-yielding-more-than/


2020 has been a tough year for income investors, as the COVID-19 crisis forced many companies to abruptly cut or suspend their dividends. However, many reliable dividend stocks survived that wash out, and continue to pay forward yields exceeding 5%.

Let's examine three of those high-yield heavyweights: AT&T (NYSE:T), Seagate (NASDAQ:STX), and Philip Morris International (NYSE:PM). All three of these blue-chip companies face near-term headwinds, but their core businesses could stabilize in the near future -- so investors who buy these high-yielding stocks could be well-rewarded for their patience.


1. AT&T

AT&T is one of the top wireless carriers in the U.S. It's also a leading pay-TV provider, thanks to its takeover of DirecTV five years ago, and its acquisition of Time Warner in 2018 turned it into a media juggernaut.

AT&T faces three main headwinds: Its wireless business faces tough competition, it's ceding pay-TV subscribers to streaming services, and the COVID-19 crisis crippled its new WarnerMedia segment by postponing releases of new movies and shows.

As AT&T dealt with all those challenges, it attempted to unite its fragmented ecosystem of streaming services, divest its weaker business units, and reduce its long-term debt. Moreover, it maintained that juggling act while dealing with an activist challenge last year and a CEO change earlier this year.

Analysts expect those pressures to reduce AT&T's revenue and earnings by 6% and 11%, respectively, this year. However, its growth could stabilize next year as the pandemic passes, new 5G handsets hit the market, and its streaming efforts start to bear fruit.

Investors clearly aren't excited about AT&T's near-term prospects -- that's why its stock declined over 20% this year, and trades at just nine times forward earnings. However, AT&T has also raised its dividend for 36 straight years, making it a Dividend Aristocrat of the S&P 500, and its forward yield of 7% will provide some decent income even as its stock treads water. It also spent just 57% of its free cash flow on its dividend over the past 12 months, which leaves it plenty of room for future hikes.


2. Seagate Technology

Seagate is one of the world's largest producers of platter-based HDDs (hard disk drives). Sales of HDDs have decelerated in recent years due to competition from flash memory-based SSDs (solid state drives), which are smaller, faster, more power-efficient, and less prone to damage than HDDs.

Seagate's main HDD rival, Western Digital (NASDAQ:WDC), aggressively expanded into the SSD market by buying flash memory chipmaker SanDisk in 2016. But instead of following WD's lead, Seagate focused on developing cheaper and higher-capacity HDDs for cost-conscious enterprise and data center customers.

Seagate's less capital-intensive business model generated more free cash flow for buybacks and dividends. That's why Seagate continued to pay its dividend throughout the COVID-19 crisis, while WD suspended its dividend earlier this year.

Seagate currently pays a forward yield of 5.4%, and it raised its dividend for the first time in four years last November. It spent 60% of its FCF on those payments over the past 12 months, and it could raise its dividend again this year if the macro headwinds wane.

For now, analysts expect Seagate's revenue and earnings to decline 5% and 8%, respectively, this year. Its HDD shipments to the video and image application, mission critical, and consumer markets could continue to decline and offset stronger shipments to the cloud and data center markets.

That near-term outlook seems grim, and the stock's 20% decline this year and its low forward P/E of 9 reflect that pessimism. However, Seagate was in the middle of a cyclical recovery prior to the pandemic, and its revenue had risen year-over-year for two straight quarters with expanding gross margins -- fueled by rising sales of its higher-capacity drives. That disrupted recovery could resume after the pandemic passes, its low valuation and high yield should limit its downside potential.


3. Philip Morris International

Philip Morris International, the tobacco giant that split from Altria (NYSE:MO) in 2008, sells top cigarette brands like Marlboro overseas. Like its domestic counterpart, PMI is struggling with declining smoking rates worldwide.

PMI generally raises its prices and cuts costs to squeeze growth from its declining cigarette shipments. It's also aggressively expanding its lineup of iQOS devices, which heat up tobacco sticks instead of burning them, to new markets.

Those two strategies have helped PMI generate stable revenue and earnings growth over the past few years, even as its core cigarette business shrank. It also suspended its buybacks five years ago due to unpredictable currency headwinds, which freed up even more cash for its dividends.

That's why PMI currently pays a forward yield of 5.9%. It's raised that dividend every year since it split with Altria, and it spent 93% of its FCF on those payments over the past 12 months .

Wall Street expects PMI's revenue and earnings to decline 4% and 2%, respectively, this year as the pandemic shuts down top cigarette retailers like convenience stores. However, its growth is expected to rebound next year after the pandemic ends.

Investors don't seem to be too excited about PMI: Its stock has declined about 7% this year, and trades at just 14 times forward earnings. Over the long term, PMI could also run out room to raise prices and cut costs. But for now, PMI remains a good defensive stock for a market downturn, and its strengths should continue to outweigh its weaknesses for at least a few more years.

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