AT&T Stock: Bad DirecTV Acquisition Won’t Hurt Dividend

   
AT&T Stock: Bad DirecTV Acquisition Won’t Hurt Dividend

By now, you’ve seen the news: AT&T (T) is buying pay TV rival DirecTV (DTV) for a whopping $48.5 billion in cash and stock in one of the biggest mergers in years. Including the assumption of debt, the deal comes to $67.1 billion.

ATTLogo AT&T Stock: Bad DirecTV Acquisition Won't Hurt DividendWhether or not this is a good move for AT&T shareholders is debatable. AT&T is buying a mature business with limited growth potential domestically. The cash portion of the deal – $14.5 billion – will need to be largely financed by debt, as AT&T only has about $3.8 billion in cash on hand.

Importantly for income investors who are holding AT&T stock for its juicy 5% dividend yield, the merger shouldn’t have any immediate impact on the AT&T dividend.

So, what’s the story here?

AT&T’s purchase of DirecTV is very much a “me too” merger following the $45 billion union of Comcast (CMCSA) and Time Warner Cable (TWC) to form a TV and internet juggernaut. From the looks of things, it looks as if AT&T’s motivation was a fear of being left behind by its larger rivals. The move will massively expand AT&T’s pay TV presence; at 20 million, DirecTV has roughly four times as many TV subscribers as AT&T.

Satellite operators like DirecTV and it rival, Dish Network (DISH), have been steadily gaining ground on the traditional cable companies. Collectively, though, the cable companies have over 20 million more subscribers than the satellite operators (55 million and 34 million, respectively). Bringing up the rear, telecoms AT&T and Verizon (VZ) together have about 10 million subscribers.

I certainly understand AT&T’s desire to move beyond its current core business lines, all of which are mature businesses or – in the case of fixed-line telephony – businesses in terminal decline. Mobile phone plans are brutally competitive on price, and smartphones – whose data plans have been a massive source of growth in recent years – are near the market saturation point in the U.S. Piling on the pressure for AT&T stock, rivals like T-Mobile (TMUS) have upended the business model by offering cheap unlimited voice, text and plans and by eliminating carrier subsidies on handsets.

But pay TV? By making a massive commitments to pay TV via the DirecTV merger, AT&T stock seems to be staking its future on another mature and brutally competitive industry, and one whose future is murky at best.

Last year, the number of pay TV subscribers in America fell for the first time in history, down 251,000. Growth has been stagnant for years. The vast majority of Americans already have paid TV, though many Millennials – raised on the Internet – have found they can live without it. Frankly, they can’t even afford it on their current salaries. As I wrote recently, the cost of monthly cable bills have been increasing at a rate of about 6% annually, much faster than both the rate of inflation and – importantly – wage growth. The average cable bill was $86 in 2011. By 2015, it is forecast to be $123 per month.

Perhaps not surprisingly, customer satisfaction with pay TV is falling. According to the American Customer Satisfaction Index (ACSI), satisfaction with pay TV fell 4.4% in the latest update. The pay TV industry sunk to an ACSI score of 65 (out of 100), making it one of the lowest scores of all 43 industries tracked by ACSI.

DirecTV is a bad buy for AT&T. But most investors that buy AT&T stock aren’t buying it for growth; they buy it for its rock-solid dividend.

The good news is that I don’t see this merger having an impact on dividends for AT&T stock. Despite the high yield of 5%, T stock’s payout ratio is only 53%. And while AT&T will probably increase its debt burden by more than 50% once the deal is finalized, the increased leverage will not be enough to put AT&T at any real risk.

Bottom line: The DirecTV purchase is a questionable business move, but it won’t have any adverse effect on AT&T’s dividend.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.


Article printed from InvestorPlace Media, http://investorplace.com/2014/05/att-stock-dividend-stock/.

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