The AT&T Dividend Cut Is Unfortunate But Necessary

AT&T Inc. (NYSE:T) has been underperforming, as it has declined about 5% and 9% in 2021 and for the past year respectively. There has been an abundance of news since the last time I wrote about T stock.

Image of AT&T (T stock) logo on a gray storefront.

Source: Jonathan Weiss / Shutterstock

There has been a catalyst that changes how attractive T stock is in a portfolio for income generation, as its current forward dividend and yield of $2.08 and 7.6% respectively are to be trimmed down about 50% in 2022.

I wrote last year that “while the expected growth for the next three to five years is 3.42%, this stock has an attractive dividend yield. Its forward dividend and yield are $2.08 and 7.27% respectively, compared to the average S&P 500 yield of about 1.64%.” I considered it to be a key player in the 5G industry and was optimistic.

With the pending dividend cut, I have both good news and bad news now to base my analysis on. But first, let me state by saying that the 5G industry is set to be a game-changer in areas as diverse as autonomous driving, smart cities, smart homes, healthcare and logistics and shipping.

5G Growth in the Next Five Years

A report by Markets And Markets regarding the global 5G services market mentions that “the global 5G Services Market size is expected to grow from USD 53.0 billion in 2020 to USD 249.2 billion by 2026, at a Compound Annual Growth Rate (CAGR) of 29.4% during the forecast period.” Another one by Gartner on 5G network infrastructure states that “worldwide 5G network infrastructure revenue is on pace to grow 39% to total $19.1 billion in 2021, up from $13.7 billion in 2020.” It also notes that 5G coverage will reach 60% in tier-1 cities in 2024.

Given these reports, I believe that AT&T has taken a bold, wise business decision by focusing on 5G. The catalyst for the dividend cut is the sale of its WarnerMedia division to Discovery (NASDAQ:DISCA), but eliminating it will allow the company to focus on this important technological upgrade.

AT&T has also recently announced a partnership with General Motors (NYSE:GM) to bring “5G cellular connectivity to millions of GM vehicles coming off the assembly line over the next decade in the United States.” The company also announced a partnership with Cisco Systems (NASDAQ:CSCO) to launch 5G for internet of things devices. Both of these partnerships should deliver strong revenue growth.

A Bold Management Decision

The WarnerMedia spinoff will provide several billion in cash that will be used to strengthen the balance sheet. However, it will also cut the very attractive forward dividend yield of about 7% to about 4%.

To income investors, this substantial dividend yield cut is too important to ignore, and I believe that next year there will be a lot of individual and institutional investors that allocate some part of their T stock holdings to other stocks with higher dividend yields or high-dividend ETFs (exchange-traded funds).

Looking on the bright side, a dividend yield of about 4% would more than double the average yield of S&P 500 companies, which is about 1.3%.

T Stock Earnings

The second-quarter 2021 earnings report delivered plenty of positive news. Consolidated revenues are $44 billion, up 7.6% from the year prior. The diluted earnings per share is 21 cents compared to 17 cents, and the adjusted EPS is 89 cents compared to 83 cents.

The management also appeared optimistic and pleased with the results.

“We’re pleased with our performance and our momentum is strong,” said CEO John Stankey. “For the fourth consecutive quarter, we saw good subscriber growth across wireless, fiber and HBO Max. Mobility delivered strong service revenue, EBITDA and postpaid phone growth. Our fiber business, which leads on customer satisfaction, grew subscribers and penetration.”

This earnings report shows that the management has already delivered strong positive results. With the pending dividend cut, AT&T can use the proceeds from the dividend cut to strengthen its balance sheet and increase the retained earnings. Excess funds that aren’t used to offer high dividend yield can be used for future growth. I believe that AT&T can now pursue higher growth opportunities and pay off its debt gradually. If it delivers growth in sales and profitability and continues to deliver high positive free cash flows it will transform from an income stock to a growth stock with an attractive dividend yield. That seems great to me.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.


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