Bad News for T Stock?
AT&T Inc. (NYSE:T) has been fattening investors’ pockets for years now. It is an absolute profit machine, but can T stock keep delivering such a high dividend yield?
Telecommunications names can be difficult to understand because the underlying business is so technical. From antiquated telephone wires to fiber optic Internet cables, telecoms engage in business that’s hard for a layperson to understand.
But the upside is we don’t really need to suffer through an endless stream of jargon to appreciate AT&T’s dividend. All we need to do is decipher whether or not AT&T can afford to keep paying out a five percent yield for the foreseeable future.
And I have excellent news on that score. Not only is T stock likely to keep paying hefty dividends, but investors could also see some capital gains while they hold the stock. The company’s dividend has increased 480% since 2003. (Source: “AT&T Inc. Dividend Date & History,” NASDAQ web site, last accessed April 12, 2016.)
However, critics argue that AT&T’s pay television business is experiencing a secular decline in pay television. While the official numbers aren’t dramatic, they argue that a slow drip of cord cutting could hurt the company’s cash flow.
The rise of video streaming is, they say, the end of cable. While the threat of cord cutting is very real, much of the losses could be offset by growth in the broadband division of the company. Watching videos online eats up a lot of bandwidth, so using Netflix still funnels money back into AT&T’s pocket.
Nonetheless, a reduction in pay television could hamper the firm’s bottom line. The company is also facing increased competition from Sprint Communications Inc and T-Mobile US Inc. In order to stay competitive, AT&T has had to invest in its network.
Once again, these circumstances can have a slimming effect on margins. Thinner margins could put pressure on the firm’s cash flow and that could in turn result in cuts to the dividend. But frankly, that doesn’t seem likely.
AT&T managed to keep up its dividend payments during the financial crash, when blue-chip stocks were falling like flies.
And not just a shadow of its earlier dividend either.
AT&T actually increased its dividend twice during the crisis, once at the start of 2008 and again in the first quarter of 2009. This was proof that AT&T was countercyclical, which is a fancy way of saying it doesn’t break when the economy is in a funk.
Heck, a full-blown recession didn’t stop AT&T from raising its dividend, so I doubt cord cutting will have much of an effect. But if you want further proof, just look to the company’s last earnings release. Its free cash flow dividend payout ratio was 64%. (Source: “AT&T Financial and Operational Results,” AT&T Inc. web site, January 26, 2016.)
That means that after all the operational expenses, taxes, and investments, only $0.64 of every available dollar at AT&T was spent on dividends. The company has more than enough room to boost its dividend again, so don’t be surprised if it does.
After all, AT&T has raised its dividend consistently for the last 32 years.