Sell Alert: 2 Popular High Yields Getting Too Pricey

Core Viewpoint - The high-yield sector is experiencing a recovery, but certain stocks, particularly AT&T (T) and Altria (MO), may not offer attractive risk-reward profiles due to rich valuations and weak business prospects moving forward [5][8]. Company Analysis: Altria (MO) - Altria has seen a significant decline in volume demand for its smokable products, with volume declines accelerating recently, indicating an unsustainable core business model [4]. - The company’s 8% dividend yield is attractive, and its status as a Dividend King is notable; however, it is considered a shrinking entity due to the rapid decline in its core business [4]. - Analysts expect Altria's EBITDA to grow at a meager 0.8% CAGR through 2028, with earnings per share projected to grow at 3.2% CAGR, which is not impressive given the associated risks [4]. - The stock's price-to-earnings ratio is 9.8 times, slightly elevated compared to its five-year average of 9.5 times, suggesting potential for valuation multiple compression [4]. Company Analysis: AT&T (T) - AT&T has made progress in deleveraging its balance sheet and is improving its free cash flow generation [11]. - Despite decent underlying business performance, growth is expected to be weak due to intense competition from Verizon (VZ) and T-Mobile (TMUS), limiting pricing power and market share [7]. - Analysts forecast a 2% revenue and EBITDA CAGR through 2028, with earnings per share CAGR slightly higher at 2.8%, while dividend growth is expected to be just 0.9% [7]. - The forward dividend yield is currently at 6%, with an EV/EBITDA valuation of 6.6 times, aligning with its historical average, indicating limited potential for total return outperformance [7]. Industry Outlook - The high-yield sector is in flux, with potential Federal Reserve rate cuts anticipated, which could serve as a catalyst for the sector [10]. - Inflation remains sticky, and the yield curve is steeply inverted, suggesting that long-term interest rates may not decline significantly in the near term, impacting high-yield stocks [10]. - There has been a market rotation from tech stocks to value and dividend stocks, benefiting sectors like REITs, utilities, and dividend growth stocks [10].