Why Citigroup Is Warning That AT&T and Verizon Yield-Chasing Has Gone Too Far

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Despite being booted out of the Dow Jones Industrial Average in early 2015, AT&T Inc. (NYSE: T) shares have been a top performing yield stock in 2016. AT&T has even seen a year-to-date gain of 30% coming into Thursday. Now one analyst is saying that this stock’s run has gone too far despite it still having roughly a 4.5% dividend yield. Also covered in the same light is Verizon Communications Inc. (NYSE: VZ) with its 4.05% yield.

Citigroup issued an analyst downgrade from Buy to Neutral on Thursday on AT&T, noting that the dividend yield chase has gone too far. Again, the same call was more or less made on Verizon in this call. What makes the call more interesting is that Citi also raised its price targets at the same time it made the official rating downgrades.

AT&T’s price target was raised to $46 from $42, and Verizon’s price target was raised to $58 from $53. The Thomson First Call consensus analyst price targets are $39.79 for AT&T and $52.52 for Verizon, both of which are lower than the current share prices of these telecom giants.

Citi’s main view here is that the crowded dividend trade, meaning investors chasing stocks with solid high-yields that are safe dividends, could reverse course if interest rates manage to rise. Citi’s view is that mega-cap telecom stocks have been chased because of their defensive characteristics and were the beneficiaries of a Fed-induced low rate investing climate. This has taken place even as the fundamental performance has been arguably mixed for the industry and specifically for AT&T and Verizon.

Citi’s report said:

Our lowered rating contemplates the investor demand for dividend yield, which has benefited the shares in recent periods and put valuation multiples near historic highs.

Verizon shares were last seen trading down 0.9% at $55.72 on Thursday, in a 52-week trading range of $38.05 to $56.95. AT&T shares were down 1.0% at $42.65, versus a 52-week range of $30.97 to $43.89.

24/7 Wall St. would remind readers that other analysts have commented about AT&T and other high dividend stocks in recent days. Some analysts remain very positive, and some analysts seem more concerned over valuations.