The Flaws of AT&T Stock More Than Outweigh Its Generous Dividend

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AT&T’s (NYSE:T) performance continues to be sluggish. T stock is down nearly 20% from its 2017 peak and is flat over the past year. As the company digests its massive Time Warner purchase, shareholders are hoping that the deal will soon  start to pay off for AT&T stock price.

Here Are 3 Reasons Why Spinning Off DirectTV Would Help AT&T Stock

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Don’t get your hopes up too high, though. AT&T has made or attempted other big acquisitions with little success in the past. Its streaming strategy is already in disarray, with the Wall Street Journal reporting that the company had to scrap its three-tier model and offer all of its content for just one price. And the company seems set to take a sizable write-off as it tries to figure out some way to dispose of its sinking DirecTV unit. Given all of AT&T problems, expect T stock to remain stuck in its quagmire awhile longer.

AT&T Tries to Offload Its Sinking DirecTV Unit

I’ve been a harsh critic of AT&T’s dealmaking in general and its purchase of DirecTV in particular over the years. With this acquisition, as with so many of AT&T’s recent deals, the company  bought into a sector right at the peak of its hype, leaving T to absorb losses as the “next new thing” supplanted it.

In the case of DirecTV, AT&T paid a whopping $49 billion ($67 billion including debt) for the satellite TV operator. Since then, DirectTV’s value has eroded sharply, though just how far remains an open question.

In any case, AT&T appears to be ready to get rid of DirectTV and write off its loss. Reports have emerged that AT&T is trying to merge DirecTV with its main rival, Dish (NASDAQ:DISH). As DirecTV is now bleeding hundreds of thousands of subscribers a quarter, uniting the two would make sense because such a deal would help reduce their costs as their revenues plummet. In any case, Dish’s market cap is only $17 billion now, giving an indication of just how much money AT&T wasted on its terrible purchase.

But even the merger that AT&T is mulling may not solve the problem. JP Morgan analyst Philip Cusick panned the idea, saying that DirectTV and Dish may not fit well together culturally and that it may be difficult to obtain regulators’ approval to merge the two firms. The analyst added that: “We believe the dis-synergies of pulling DirecTV away from AT&T’s U-verse in buying power would be value destructive.”

From its questionable venture into Mexican telecom, to DirecTV and now its unclear streaming strategy, however, AT&T is nothing if not good at being value destructive. Since 2007, T stock is down 20% while the S&P 500 has nearly doubled. Look back and it’s even worse; AT& stock price peaked around $60 in 2000 and is down nearly 50% since then.

Should Investors Buy T Stock for Its Dividend?

Soon it will be T stock owners’ favorite time. T stock is expected to go ex-dividend in just under a month. The company is currently paying $2.04 per share per year. That amounts to a 6.67% dividend yield on AT&T stock.

T stock is the highest-yielding name in the Dow Jones Industrials index, and pays one of the highest dividends of any large-cap American company. With interest rates in free-fall again as the economy decelerates, T stock’s dividend looks very interesting as an income play.

I’m not sold on it, however. For one thing, AT&T is the most indebted company in the world. Yes, it is making promises to pay down its debts over time, and asset divestitures, such as doing something with DirecTV, could help it accomplish that goal.

But AT&T is going full steam ahead with its risky content/video streaming gambit that will put it in competition with highly-competent competition from Netflix (NASDAQ:NFLX), Walt Disney (NYSE:DIS) and many others.  Until the company’s streaming project reaches critical mass, T is likely to lose large quantities of  money on the initiative . Moreover, it makes little sense strategically for AT&T to spend so much of its cash flow on a dividend when it is trying to reposition the company aggressively towards growth and new markets.

AT&T’s entrenched and unchanging capital allocation policy puts the company in a bind going forward. Its shareholders own T stock mostly for the dividend. But it is rushing into a viciously competitive playing field where its rivals aren’t bogged down by massive debt and dividend obligations. Yes, the yield on T stock is nice, but it could cripple the company in coming years.

The Verdict on T Stock

I still can’t warm up to AT&T stock now. Sure, its dividend is huge, and it is safe for the time being. But there’s very little to be cheery about aside from that.

With interest rates in a massive decline, AT&T stock should be on fire. Other conservative sectors, like utilities, REITs, and consumer staples are all exploding higher. The Utilities SPDR ETF (NYSEARCA:XLU), for example, is up 15% this year and has hit new all-time highs. Other telecom stocks are doing better than AT&T as well. T-Mobile (NASDAQ:TMUS) is up nearly 20% in 2019, and Verizon (NYSE:VZ) is in positive territory as well.

Unfortunately for the owners of T stock, they’re likely to see more underperformance going forward. The company’s haphazard deal-making is likely to continue destroying shareholder value, leaving investors with little more than the dividend in return for their investment. It wouldn’t be at all surprising to see T stock drop back under $30 once this current rush into dividend-paying stocks blows over.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/the-flaws-of-att-stock-more-than-outweigh-its-generous-dividend/.

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