AT&T Is Going Nowhere, and That Might Be Fine – For Now

AT&T's 5.4% yield is fine, if you don't mind a no-growth stock

AT&T (T) is a no-growth company. It’s been that way for years. Yeah, AT&T has bumped revenue up by $5 billion in the past couple of years, but cost of sales rose by the same amount. In fact, gross profit in FY14 was below that of FY12.

AT&T stock

AT&T has SG&A expenses of $41 billion, which is slowly rising, and $18 billion in other expenses. Once everything filters to the bottom line, we find AT&T net income went from $7.26 billion in FY12 to $6.2 billion in FY14.

Why Buy This No-Growth Company?

Because of the 5.4% dividend. That dividend may cost AT&T about $9.5 billion annually, but AT&T generates about $10 billion every year in free cash flow. That’s the entire AT&T story, or it was until last year, when it agreed to buy DIRECTV (DTV) for $95 per share.

So, a no-growth company bought…a slow-growth company. It’s not that DIRECTV is a bad company, it’s just that growth had slowed.

The reason for the AT&T-DIRECTV merger was because AT&T needed something to energize its growth. AT&T is expanding video delivery beyond its flagship U-Verse and into satellite. With DIRECTV’s subscription base, it can get better deals from content providers.

DIRECTV also made a solid move into rural America, and now AT&T gets to market to that base, as well as to DIRECTV’s huge Latin America base. The satellite company had been expanding very successfully in that region, and now it gets an extra dividend.

Investors Are Left With a Weird Situation

The combined entity has a pretty solid financial base — it will have $15.2 billion in cash, and free cash flow of $13 billion. It will be a major technology-telecom-distribution play with few rivals, if any.

But, it will be loaded with $95 billion in debt.

The debt is ginormous, but manageable because both companies are cash flow businesses. Don’t have any illusions about it ever getting paid off, though.

Why would anyone want to hold AT&T stock, post-merger, when growth is going to be marginal? EPS is being financially engineered because both companies are engaged in stock buybacks.

I say it again — the dividend.

People see that 5.4% yield and get very excited, and I don’t blame them. The dividend is probably safe for the long term. I just wonder why people would take a risk on a stock with little capital gains potential, when they could get into a preferred stock or preferred stock ETF that pays more and has less risk.

Bottom Line on AT&T Stock

If interest rates rise, which they will at some point, and bonds truly compete with dividend stock yields, investors will be quicker to sell a no-growth play like AT&T stock than preferred stock yielding 8%-9%.

The iShares US Preferred Stock (PFF) is an ETF paying 6.09%, that I wrote about back in March. There are great preferred issuances, like those of Ashford Hospitality Trust (AHT), paying more than 8%, whose underlying fundamentals are so strong that the preferred shares are a veritable bargain.

AT&T stock may be for widows and orphans, and for now, that’s just fine. For now.

Lawrence Meyers owns shares of AHT, AHT Pref. D, and PFF.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/att-stock-dividend-yield-going-nowhere-fine/.

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