Time Still Not Ripe To Invest In AT&T

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Mar 16, 2015

It is not always that experts recommend investors stay away from stocks that pay reasonably well. However there are certain cases where stocks keep on increasing their dividends but do not pay focus on improving their business. If you find a stock that has a good dividend yield but stagnant growth rates, it is a clue for you to avoid such a stock. By investing in these stocks, you might be treated to short term gains through good dividends; however, you might suffer losses in the future, as there are high chances for these companies to slash their dividends or to report huge losses. As per Wall Street experts, investors should avoid buying the following stock currently though it pays out a reasonable amount of dividends.

Weak cash flow and stiff competition

AT&T (T, Financial) may be one of the biggest telecommunications company in the U.S.; however analysts believe that this stock should be avoided right now. This might come as a surprise because AT&T has an impressive dividend yield of 5.5% currently. It is very easy to get carried away by these high payouts, but investors need to understand that a decision as big as investing in a particular stock, should never be taken on the basis of dividends alone. While trying to understand more about free cash flow generation, it came to light that during 2014, the company’s cash flow had come down during the year when compared to figures of last year. This should ring alarm bells for investors as situations do not favour the company right now.

Also, AT&T is facing tough competition from smaller players like Sprint (S, Financial) and T-Mobile (TMUS, Financial). These small companies are coming up with lots of plans and free services for Wi-Fi and phone calling purposes. If these companies grow at the current rate, they could easily take away the market share from AT&T very soon. That would put the telecom major in a very embarrassing position. If the core businesses of AT&T are affected, it would be left with no choice but to cut down its dividends to a great extent in the near future. Dividends and share price history of AT&T are seen below:

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Poor customer service is not helping AT&T

In addition to problems of sustaining in the market in the light of increased competition, there is one more issue that AT&T is suffering from. It is reduced customer satisfaction. Recently in one of the ranking websites, AT&T was ranked No.1 in the list of companies with the worst customer satisfaction. There were many problems with the company like faulty connections and unethical practices while preparing the telephone bills of customers. During October 2014, AT&T was slapped with a fine of close to $105 million for problems related to bill cramming, that is charging customers over and above their usage. The Federal Communications Commission was the one who directed AT&T to pay this fine, an amount which was the highest in the telecom major’s history. It is usually said that companies can easily bounce back from financial problems, but not from problems related to loss of brand image and reputation. AT&T is no exception to this rule. It is indeed doubtful if customers will begin to trust the company with the same intensity as they did before. This could hurt the future prospects of the company to a great extent.

Conclusion

The telecommunication sector is not in its brightest phase right now. Hence, analysts advise investors against investing in this sector. There are other bigger and better sectors available for investors who are looking for good returns. AT&T might have a great dividend yield; however with the future not looking good enough, investors should stay away from this now, at least till the company finds a way to restore its brand image and outperform its competitors.