The Only Reason To Own AT&T Stock Is the 8% Dividend

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AT&T (NYSE:T) stock recently hit its lowest point since 2010. And, if you bought AT&T stock 20 years ago, you’d have lost around 40% of your starting capital in the ensuing two decades, not counting dividends. With shares seemingly making new lows almost every week, AT&T has turned into a battleground. Is AT&T a huge opportunity or a massive value trap?

Image of AT&T (T) logo on a gray storefront
Source: Jonathan Weiss/Shutterstock

The answer lies somewhere in the middle. For now at least, AT&T stock continues to offer a huge and reasonably safe dividend. On the other hand, folks expecting large capital gains should look elsewhere. At least until AT&T changes its management team, don’t count on the company to deliver much beyond its quarterly dividend payment.

Taking On Oodles Of Debt For Uncertain Future Gains

AT&T has a history of making massive deals. And unfortunately, a number of these have not worked out. The company’s expansion into the deregulated Mexican cellular market has been a flop; AT&T remains a distant third in market share there. And its DirecTV adventure ended on a sour note. AT&T paid $49 billion for DirecTV in 2015 and intends to sell it this year for less than half that sum after losing millions of subscribers.

These sorts of multi-billion dollar mistakes pile up. And now, AT&T has taken an even bigger swing. In paying $85 billion for Time Warner, AT&T has made a massive bet on its ability to become a media company. However, that’s quite a different beast from its core telecom competency. In particular, AT&T is investing heavily in its HBO streaming offerings, hoping to build a credible rival service to Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX). However, given AT&T’s distinctly underwhelming performance with past acquisitions, it’s not surprising that investors are skeptical about this one as well.

In the meantime, in completing that Time Warner purchase, AT&T earned the dubious honor of being the world’s most indebted company. Now the company is selling off other assets, such as the ill-fated DirecTV, to try to pay down the debt it took on in the Time Warner deal. However, it looks management is just stumbling from one questionable decision to the next.

The Dividend In Focus

Many investors in AT&T stock own shares primarily for the dividend. And there’s good news on that front. AT&T stock, given its recent fall in price, is now offering its highest dividend yield ever (at least according to Ycharts’ data set, which goes back to 1988). At a nearly 8% yield, AT&T shares are a veritable income gusher in an otherwise largely-arid stock market.

The question is though: Will AT&T eventually cut its dividend? Again, there is a positive take on this as well. Analysts project that AT&T will earn between $3.10 and $3.30 per share each of the next three years. If the company can consistently earn more than $3/share in annual profits, then its $2.08 annual dividend is easily affordable out of ongoing earnings.

Thus, purely from an operational basis, AT&T can continue to pay out its current dividend — or even increase it slightly — without any near-term problems. The issue, however, comes over the longer-term. As of last quarter, AT&T had more than $150 billion in net debt. It’s not going to be able to pay down much of that with merely the leftover earnings after paying out its juicy dividend.

At some point, it will likely need to sell more assets, and/or improve its profitability significantly to shore up its balance sheet. Particularly in the event that interest rates go up, AT&T could hit a tight spot. Increase interest rates just 2%, and AT&T would owe an extra $3 billion a year in interest on its debt. All this will work out fine if HBO streaming becomes a big winner. But given AT&Ts performance with past acquisitions, that’s far from a sure thing at this point.

AT&T Stock Verdict

The good news for AT&T stock is that the price now reflects the company’s operational weakness. When shares were up at $40, it was hard to see any possible upside. Here at $26, however, it’s not hard to imagine the stock bouncing decently in 2021.

Over the longer-term, though, AT&T needs structural change. The current management team has consistently pursued poor investments and unsound strategic direction. You get a lot of margin for error when you lead an oligopoly market like mobile phone service. The huge recurring cash flows off that trophy asset have covered up a lot of errors elsewhere at AT&T.

At some point though, investors lose patience. You’re seeing that this year, as AT&T’s share price has steadily slid. For now, the dividend is still safe, and that will provide AT&T with a hard floor. In a world starved for yield, it’s not hard to make the case for AT&T stock as a quasi 8% bond. Don’t count on it for much more than that anytime soon, though. And be watching its earnings closely. If the streaming business doesn’t work out, AT&T could face some financial challenges in a few years.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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.

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/2020/11/the-only-reason-to-own-att-stock-is-the-8-dividend/.

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