When it comes to blue-chip stocks, AT&T Inc. (NYSE:T) is a lovely shade of navy. Ma Bell is as blue as they come and the telecommunications giant has powered portfolios for decades with its healthy dividend and strong earnings profile. However, these days there tends to be some static on the line and the operator isn’t taking investors calls for T stock.
AT&T started its major transformation back in 2014 when it purchased DirecTV and more recently through its buyout of content provider Time Warner Inc (NYSE:TWX).
The idea was to help get T over the hump and through wireless saturation in the U.S.
But what it has really done is caused some analysts to start questioning AT&T stock’s ability to keep paying that “widows & orphans” dividend.
It potentially could be a serious problem if analysts are right. The question is, are they? Is the generous T stock dividend actually in danger?
T Stock and the Spending Spree
The problems at AT&T could be summed up in one word. And that’s wireless. During the early days of cell and smartphone adoption, T, and its main rivals thrived on continued additions and more people getting hooked on mobile.
The problem these days is that cell phones are a dime a dozen. Everyone has them. So subscriber growth has been less than stellar over the last few years. Moreover, AT&T and chief rival Verizon Communications Inc. (NYSE:VZ) have been forced to offer unlimited data plans to compete with upstart T-Mobile US Inc (NASDAQ:TMUS). Wireless simply isn’t as lucrative as it once was. And that has the big telecommunications giants thinking differently about how to find growth.
For AT&T stock that meant getting into the content distribution and creation game.
By buying DirecTV, T had a way to get more video in the hands of its customers, while TWX features some of biggest franchises in movie, tv and music. When combined with bundling and streaming, the company would be able secure more customers and potentially charge them for more data as they stream movies and content from their mobile devices.
That’s the idea anyway. With its latest earnings report, which does not include Time Warner as the deal hasn’t closed yet, AT&T seems to be struggling on that front. Earnings have been on a slide since the DirecTV deal was completed. Revenues dropped this quarter as did the number of mobile subscribers.
None of this is good news. Perhaps worse when you consider just how much debt T has undertaken over the last few years to make its current product mix possible. In just four short years — 2012 to 2016 — AT&T spent about $140 billion on investments in its networks and acquisitions of wireless spectrum. DirecTV cost the company a whopping $67 billion when including debt.
All of this has pushed T’s total long-term debt up to a staggering $120 billion. And we haven’t even included the $85.4 billion for TWX.
With such a huge debt burden and declining revenues and profits, analysts have now begun to question the ability of AT&T stock to keep its dividend going. Right now, T stock is paying $1.96 in dividends, while the over the last 12 months it has earned only $2.04 in profits. That results in an insanely high payout ratio of 88%. That’s not exactly a recipe for long-term success, and some analysts have even called for T to cut its payout and use the savings to pay down its high debt burden.
AT&T Stock: Why the Dividend Is Safe … for Now
While the case for a dividend cut is strong and could be made, the truth is that the T stock dividend might be as good as gold. That’s because most dividends are paid from free cash flows. And luckily for AT&T, it has them in spades.
Last year, T managed to have around $17 billion in free cash flows. That’s what is left over after subtracting out CAPEX/OPEX spending from operating cash flows. AT&T’s dividend was only about $12 billion of FCFs. And there have been plenty of instances when T’s profits barely matched the payout, and the firm was able to keep the dividend going. So the firm should be able to keep paying its generous dividend. Albeit the growth of that dividend may not be too great given the high debt load and the need for extra cash to pay it off.
The concern is that operating cash flows start to dwindle substantially if the content push doesn’t work according to plan or more customers jump ship to TMUS. This could result in lower operating cash flows. In this instance because of the higher debt expenses, which could balloon to $175 billion when TWX is bought — could suck the life out of T’s dividend. And given the higher debt balance, the company may not have much wiggle room.
But in the meantime, that 5.10% yield is safe.
The Bottom Line
Recently, a lot has been written about dividend stalwart AT&T and its dividend not being safe. While there are concerns, such as rising debt levels and dwindling revenues, T still has the goods to keep it going — at least in the near-term.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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