There may be no more classic blue-chip dividend company than AT&T, Inc. (NYSE:T). Long considered to be a “safe” stock, T stock has not climbed into the stratosphere like many of its peers. That’s not to say that AT&T stock is every investor’s dream security.
T stock has a few problems and a few nice things. Ultimately, for this investor, buying AT&T stock is really just to get the 4.76% dividend.
As it happens, T also reported earnings and they tell a lot about why I feel the way I do. Let’s hit the big points for the quarter and the full year.
T Stock: Earnings Breakdown
For Q4, revenues came in at $41.8 billion, which was down about 1% year over year.
Operating income was $4.2 billion vs. $7.5 billion last year, while bottom line net income was $2.4 billion, but adding back all funky accounting adjustments, the real bottom line was basically earnings-per-share of $0.66 compared to $0.63 last year.
With T stock, the real thing to keep an eye on is both operating and free cash flow, since that’s where the dividend payments come from. Both of these numbers were excellent.
Cash from operations was $10.1 billion, and free cash flow was $3.7 billion, up 19.2%.
The full year offered very encouraging data, now that DirecTV’s results were folded in completely. Revenues were amazing: $164 billion, up 11.5% from last year’s $147 billion. Operating income was $24.3 billion, and net income was a whopping $13 billion.
That translated to diluted EPS of $2.10 as reported and $2.84 (after those wonky adjustments), which compared to $2.37 and $2.71, respectively, last year.
I truly love that cash from operations was $39 billion and free cash flow was a bit under $17 billion, which was up about 7%. With dividends approaching about $12 billion total, AT&T stock retains its ability to pay with no problem.
So that’s where we’ve been. Yet with T stock trading now at $41.80, where does it go from here? I can say that things look good but not great.
Bottom Line on AT&T Stock
AT&T bought out DirecTV for many reasons, but one of the many elements that it had to execute on was to create some form of streaming content provider. DirecTV NOW has launched, and in just one month, grabbed 200,000 subscribers. Now, I consider this to be low-hanging fruit. The beauty of the acquisition was that T can just market directly to DirecTV and its own customers.
So, yes, the service is still buggy, but it’ll get sorted out. Eventually, figure that DirecTV NOW will become another viable streaming service like Hulu or Sling. That’s a great concept, but it also won’t be long before these services are commoditized and not yield huge margins. That means DirecTV will need to move into original programming to keep up with Hulu.
Therein we find the reason for its acquisition of Time Warner Inc (NYSE:TW). Now the company doesn’t have to reinvent the wheel, it can just gobble up content from Warner Bros. TV and film.
Content, then, is basically one element of what one might call the “AT&T Universe”, if you’ll permit me a play on “U-Verse”. To keep pace with the future, T will try and pull in as many people as it can via satellite TV, phone and internet service and then try and synergize as much as possible with its other products.
Hey, $164 billion in sales shows AT&T is on to something. And while phone, internet and TV service are low-margin commodities, the simple truth is that’s what accounts for the revenue needed for the dividend while it pursues a growth strategy elsewhere.
It may not deliver market-beating returns for some time, if at all. But it has a chance. Regardless, you buy T stock for the dividend, and perhaps get some capital gains over the long-term.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.