Will AT&T Outshine Verizon on the Size of Its Dividend Hike?

AT&T Inc. (NYSE: T) is likely to join the ranks of companies hiking their dividends before year-end. AT&T was a Dow Jones Industrial Average component for years, but it was removed earlier this year. What is almost ironic is that AT&T would be the highest yielding Dow stock with its 5.5% dividend yield.

24/7 Wall St. recently showed that AT&T would be one of five companies hiking dividends before year-end. If this comes to pass, it will likely occur in the coming days.

With a dividend hike coming, the question now is whether AT&T will out-hike Verizon Communications Inc. (NYSE: VZ). The latest Verizon dividend hike, which was paid in October, was a 2.7% rise to $0.565 per share per quarter. The last AT&T dividend hike was almost 2.2% to $0.47 — and each of the past few dividend hikes have been by a penny per share.

AT&T remains in a four-way price war. Verizon is of course the largest competitor, but T-Mobile US Inc. (NYSE: TMUS) and Sprint Corp. (NYSE: S) have been cutting prices and coming up with every incentive and gimmick under the sun in an effort to win business. The difference here is that T-Mobile has at least been profitable and Sprint has not been.

As far as why AT&T could increase its dividend hike more than normal this time is because of the DirecTV acquisition benefits. 24/7 Wall St. had opined months before the AT&T/DirecTV acquisition closed that DirecTV actually would help offer more dividend coverage and outlined the raw dollars and cents of it then.

As a reminder, AT&T said with its October earnings news announcement that its free cash flow dividend payout ratio was 57% year to date. This is far better than the 67% dividend payout ratio in the second quarter. AT&T also increased its adjusted EPS and free cash flow outlook for the year to $2.68 to $2.74 in earnings per share and free cash flow in the $15 billion range or better.

The corresponding dividend hike in prior years has been in mid-December, and 2014 was AT&T’s 31st straight annual hike. Its payout hike at that time was 2.2%. It is far from assured, and Verizon’s 2.7% dividend hike may be irrelevant when you consider that AT&T already has a yield that is 0.5% higher than Verizon’s dividend yield.

Some analysts are starting to warm to AT&T as well. Jefferies recently gave a $40 price target on AT&T, which is almost $3.00 above the consensus analyst price target. AT&T was also included in a Merrill Lynch dividend montage of companies whose dividends would still look very attractive even when the Federal Reserve starts hiking interest rates. Also, Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) recently showed with their latest holdings that they held on to the DirecTV shares into the merger to hold AT&T shares after the merger.
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AT&T is almost certain to hike its dividend very soon. It may outshine Verizon on the percentage of a hike, or it may not hike it as much. The trick to remember is that AT&T already greatly outshines Verizon on the dividend yield.

Shares of AT&T recently traded at $34.11, with a consensus analyst price target of $37.12 and a 52-week trading range of $30.97 to $36.45. The company has a dividend yield of 5.5% and a market cap of about $210 billion.