As you certainly recall, at the beginning of the Covid-19 pandemic, governments resorted to shutting down the world, which caused an economic strain like none before. Consequently, they instructed their central banks to maintain loose monetary conditions in order to offset the economic devastation. AT&T (NYSE:T) stock, for example, fell around 30% from January levels to the March 2020 bottom.
Today we will discuss the opportunity that remains in T stock in 2022. So far the scoreboard looks dismal, but this could be the case where it’s so bad it’s good.
Now that the economic reports are healthy again, the U.S. Federal Reserve has the tricky task of unwinding the stimulus. This is not likely going to be easy, since markets are now demanding it. There is harm in keeping financial aid where there is no need. Within the confines of having quantitative easing, there is the lack of fixed income available. Therefore investors flock to stocks that pay high dividends as a mild substitute. T stock currently pays nearly 8% in dividends, so that’s a natural reason to own it.
T Stock Value Trap Risk
While a dividend like this is a viable source of fixed income, investors have to evaluate the associated risk. Sadly for current T stockholders, the reason it pays this much is grim. The yield has risen as T stock price has collapsed. It is now more than 55% below its highs, and much of that devastation happened last year. In fact, T is now below its pandemic lows when the whole world was asleep.
This is a technical hurdle that won’t be easy to overcome. When a stock loses footing from a ledge, it becomes forward resistance. I imagine the bears will fight hard to keep T stock below the pandemic lows near $27 per share. The bulls will have a tall task to reclaim it and start using it as support.
Critics have many points of conversations, as management has created much of its own drama. Consensus can turn around quickly as long as they start making smart moves. Nevertheless AT&T is still a massive company creating huge gross profits. Even after lackluster strategic performances, it still created $174 billion in sales and $91 billion in gross profits in the trailing 12 months. With a few tweaks, the company can enhance how this top line flows through the profits and losses. General Electric (NYSE:GE) did it, so AT&T can too.
Given its wild fluctuations in net income over the pandemic years, it is difficult to ascertain the value of T stock. It is therefore up to investors to find their own level of value. This will be guided by perception more so than actual, tangible figures. The trick is to not fall into the potential value trap.
Battling Age Old Levels
T stock has recently bounced off levels it had in 1993. Clearly the time to panic out of the stock has passed. Moreover, from a trading perspective this seems like a relatively safe place to initiate new positions. Investors can also enjoy some risk offset from the high dividend contributions. However, all bets will be off if management cuts the dividend. That would make the bottom much deeper.
There is also the potential danger from the overall state of Wall Street. There are growing fears that this is the end of the great bull market we have enjoyed for years. What’s contributing to that notion is the anticipation of central bank policy flip. In reality, the Fed is likely to unwind its QE with great care. It is not likely to intentionally harm investors when it spent so much money trying to prop it up.
Although it is not the Fed’s official job to do so, it has babysat investor sentiment for years. It started unwinding the QE last November by first tapering asset purchases. This effort is likely to intensify and end as early as March. The next worry comes from the anticipation of rate hikes. Inflation is now its focus, since it has achieved its other mandate by creating jobs.
On Friday we found out that the unemployment rate is under 4%. This basically suggests that we are at full employment. Now the Fed must achieve its second mandate, which is controlling inflation. Those efforts could crimp stock prices.
Until there is actual evidence of that, investors can assume that the bulls are in charge. Therefore, starting a small position in T stock now is not likely to be a financial catastrophe. There are other alternatives offering fixed income like Chevron (NYSE:CVX) and Exxon (NYSE:XOM) that pay high dividends. However the depth of T stock makes it a double play on fixed income and a recovery rally.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.