We’ve identified two solid blue-chip stocks, AT&T Inc. (NYSE:T) and Boeing Co. (NYSE:BA), offering both income and potential for growth
Income Investors | June 28, 2017 | SmallCapPower: An income investor is always on the lookout for the best dividend stocks. Since there are so many companies paying dividends, such as AT&T, how should investors determine which companies deserve capital investment?
Incomeinvestors.com has a few simple “rules” to help investors choose the right stocks: a company’s business model needs to be easy to understand and income stocks should have a history of steady and increasing dividends. These types of stocks are called blue-chip. Companies in this category have a large market cap; control a large percentage of the market due to popular, high-quality good and services; and, have predictable and growing earnings. Importantly for value investors, these companies consistently choose dividends to reward shareholders.
During bear markets, blue-chip stocks tend to outperform other investment classes due to the strength of their balance sheets and brand power. Another reason for the outperformance of blue-chip stocks in weak markets is their lower volatility. Low volatility and strong stock dividend track-record help investors preserve value.
Blue-chip dividend stocks also offer protection from inflation. When business costs increase, blue-chip companies can pass those costs on to distributors and consumers since their products and services are high-quality and in demand. Investors benefit from the business’ margins remaining strong and revenue growth over time. Growing revenue comes with a growing dividend; that is exactly what income investors expect.
Below are two blue-chip dividend stocks for 2017 to consider.
- AT&T Inc.
AT&T Inc. (NYSE: T) provides customers with communications and digital entertainment services in the U.S. and around the world. The communication side of the business provides both individuals and businesses with Internet, broadband and data, local and long distance telephone, and wireless communications services. The digital entertainment segment is involved with television services, both through owning independent channels and as a service provider. Over the past five years, revenue has grown approximately 28%, helping per-share earnings nearly double. (Source: “AT&T Inc.,” MarketWatch, last accessed June 22, 2017.)
Growth stems both from the boost in inflation and organically via the company’s current assets. AT&T continues to offer more products and services to the current customer base thereby increasing revenue with less marketing costs. AT&T is also increasing its market share by expanding into new geographic locations.
AT&T is also engaged in acquisitions, most notable the 2016 announcement to purchase Time Warner Inc. (NYSE:TWX). Given the asset overlap, there should be an immediate benefit to both revenue and earnings. The cost of running both businesses should also be reduced and increase AT&T’s overall margins. The acquisition also stands to diversify reported revenue and lowers the required capital investment. And if there are assets from the transaction that don’t suit AT&T’s business model, it can sell them. (Source: “AT&T to Acquire Time Warner,” AT&T Inc., October 22, 2016.)
AT&T pays a quarterly dividend with an attractive yield of 5.12%. The company has increased its dividend for 32 straight years. With earnings protected from inflation and growth expected from the recent acquisition of Time Warner, the streak can continue.
- Boeing Co.
Boeing Co. (NYSE: BA) is an airline company operating in various sectors. Commercial Airplanes is focused on developing, producing and marketing commercial jet airplanes to airline industries around the world. The Defense, Space and Security segment is involved in selling aircraft to military and government agencies. Lastly, the Financing division provides capital to the purchaser of the aircraft if funding falls short of the purchase price.
BA is a stock that should be considered based on the company’s future outlook. Given the large amount of capital required, aircraft are not a common, everyday purchase. Also, once an order is placed, it takes some time for the aircraft to be developed and produced; nothing is developed in advance due to customization requests.
Boeing currently has a backlog of more than more than 5,600 aircraft, worth over $480.0 million; this total represents almost four times the entire market cap of Boeing. Based on an average of the last four quarters, the current backlog would represent earnings for the next 22 quarters (assuming no growth), or five-and-a-half years. Despite this large backlog, the company continues to make more deals with airlines and government agencies. For instance, in the last quarter, $27.0 billion worth of net new orders were agreed to. (Source: “Boeing Reports First-Quarter Results and Raises EPS Guidance,” Boeing Co, April 26, 2017.)
Once an aircraft is delivered to the buyer, only then will the sale be accounted for in the revenue and earnings statements. This account method is reflected in the stock price and performance, and with such a large backlog, the earnings results should be a positive.
Boeing’s dividend is paid to investors on a quarterly basis and has been growing. Over the past five years, the dividend has increased 192%; the annual range of growth during this period ranged from a low of 10% to a high of 50%. What’s more, the dividend on a per-share basis has gone from $0.485 to $1.42.
About the Author:
This guest post was written by Gaurav Sharma, security analyst for Income Investors. He advocates for common sense, buy-and-hold investing. You can find his daily investment ideas and commentary at IncomeInvestors.com.
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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