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AT&T Stock Is a Must-Buy Dividend Stud on Earnings Pullback

On Wednesday, AT&T (NYSE:) stock tumbled, falling about 4% after the company reported its first-quarter  earnings. Earnings that were in line with analysts’ consensus estimate, lower-than-expected revenue, and a decline in DirecTV subscribers caused investors to be less interested in buying T stock.

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I think the decline of AT&T stock created a buying opportunity , but we need to look at T stock a little differently than most other stocks. Specifically, investors should think of it as an income vehicle rather than a stock.

We could surely find a stock that provides a better overall return than T stock. That’s been true over the past year, and it will probably be true again in the future. As Microsoft (NASDAQ:), Honeywell (NYSE:) and the PowerShares QQQ ETF (NASDAQ:) all push higher, it’s hard to hold T stock instead of those alternatives.

Investors shouldn’t be all-in on AT&T stock. Their portfolios should be diverse and include names like MSFT, HON and QQQ.  AT&T should be viewed as an enhanced bank savings account or CD. The stock has a 6.6% d, a yield that can’t be obtained at any bank. Such a yield would raise a red flag for most stocks.In T’s case though, I think think the company’s cash flow is large enough to ensure that its payout will not be cut.

While T’s debt load may keep a lid on the stock, let’s see how its free-cash flow will enable it to reduce its debt.

Breaking Down T Stock

were in-line with analysts’ consensus outlook, while its sales of $44.88 billion missed the average estimate by $277 million. While its top line did grow almost 18% year-over-year, that growth was primarily driven by its Time Warner acquisition. AT&T missed revenue estimates for the second consecutive quarter and for the fourth time in its last five quarters. However, AT&T is not a growth story. It’s a cash flow story.

T’s DirecTV business is struggling with subscriber losses in a cord-cutting environment. However, T’s acquisition of Time Warner has been lucrative, not just on the revenue front, but primarily on the cash flow front. AT&T reported $11.1 billion of operating cash flow (OCF), up 24% YOY.

Of that, $5.9 billion became free cash flow after capital expenditures were deducted. The Time Warner acquisition helped AT&T’s free cash flow surge more than 110% YoY.

The company paid out $3.7 billion in dividends, leaving excess free-cash flow of $2.15 billion. That gave AT&T stock a FCF/dividend payout ratio of 63.3%. A year ago, the company had a FCF deficit of $241 million after it paid out dividends.

This is a big improvement in the company’s FCF situation and I think it makes AT&T stock attractive. It means the dividend is safe, while management can focus on paying down debt. Its Time Warner asset gives AT&T strong streaming content, and its cell phone business remains a consistent cash generator.

Trading T Stock

At the beginning of April, T stock broke out, overcoming its downtrend resistance. However, after the company reported its earnings on Wednesday, T stock gave up those breakout gains. Now, though, the risk/reward ratio of T stock is favorable again.

The stock sits right near its prior downtrend resistance (depicted by the blue line). A close below this level could signal that more declines are ahead and would be an unfortunate development for the bulls. However, T stock also sits near several major moving averages, including the 50-day, 100-day and 200-day.

The 100-day, which is just above $30, is currently the lowest. Since AT&T stock closed below this mark last session, it has lost all moving average support, as well as prior downtrend resistance. If it drops below $30, things could get slippery.

Bret Kenwell is the manager and author of and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long T. 

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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