AT&T (NYSE:T) stock may be a popular play among dividend investors. With its forward dividend yield of 6.63%, that makes sense. But, before diving into this on its yield alone, keep in mind the big tradeoff those tempted by its yield have had to deal with when owning T stock.
Namely, that would be underwhelming stock-price performance. Since 2011, shares have seen basically zero appreciation. In the past five years, the stock has fallen around 20%. Even if you bought one year ago, when markets were still recovering from their coronavirus losses? You would’ve only seen a 3.5% gain. Meanwhile, markets overall saw a double-digit percentage recovery.
Sure, you can argue that, after years of mismanagement, this stock is ready to rebound. Its 2010s media acquisition binge is long over. And, with its big bet on the future of streaming, operating results could see major improvements in the coming years.
Yet competition’s heating up in streaming. Growth in this area could come in lower than expected. Sell-side analysts seem to think so, given projections of slightly negative earnings growth in the coming year.
Rival telecom plays may offer lower dividend yields. But, with a greater potential to gain, they may make for more compelling buys than this stock, which most likely will either hold steady or head lower from here.
Why T Stock Will Stay Stuck in the Mud
AT&T shares have traded sideways for the past decade. And, chances are they’ll stay that way in the years to come. Even as investor confidence has seen a boost following the company’s better-than-expected results from the most recent quarter. Both sales and adjusted earnings came in ahead of analyst estimates. But, while a top-level view of said results paints a rosy picture, the details are a bit concerning.
Namely, while earnings came in above estimates, the company’s profit margins contracted. This is due to both initial losses from its streaming operations (HBO Max), along with the company’s costly sales tactics (i.e., discounts) to boost top-level results for its wireless unit.
Some may be accepting of HBO Max’s initial losses. Yet, it’s going to take off-the-charts popularity for this relatively new service to pay off for AT&T. In order to break even, the platform needs 120 million to 150 million subscribers. The company sees this happening by 2025. Yet, with so many players in Big Media and Big Tech betting big on streaming services as well, the competition runs high. In the aggregate, subscribing to multiple streaming services may be cheaper than cable. But, households are going to have a limit.
In short, there’s plenty of reason to believe this move into streaming will fail to put points into T stock. Add in its other underwhelming prospects, and it’s easy to see shares continuing to remain stuck in the mud.
Any Dividend Cut Will Do Serious Damage to Its Share Price
AT&T may have the largest market share among wireless carriers. And, it’s continuing to invest billions in both spectrum and 5G equipment to maintain this lead. Yet, this has done little to translate into higher earnings, and, in turn, a higher share price. If anything, its heavy capital spending is simply what the company needs to do to keep things steady.
However, this need to invest capital in order to keep the competition at bay is on top of its other commitments. These commitments include growth investments for streaming, the deleveraging of its balance sheet and, of course, the paying out of its high dividend.
For now, this balancing act continues to work. But, down the road, something may have to give. That is, it’s high dividend remains at risk of eventually experiencing a reduction. So far, CEO John Stankey has continued to publicly state there’s no need for such a cut.
Yet, it’s still a risk on the table. And if it happens (whether due to rising interest rates or lower-than-expected returns from its streaming investment), expect it to do serious damage to T stock. With so many owning it just for the dividend, a reduction would definitely result in a major repricing of shares.
Bottom Line: This Isn’t Your Father’s AT&T
Some may believe that AT&T is still the venerable telecom it was in decades past. But, while it shares the same name, don’t mistake it for the “Ma Bell” of yesteryear. Spending heavily to keep its telecom business steady, and taking a big gamble on streaming (which may not pay off), there’s a lot more that could go wrong than could go right for this company in the coming years.
Don’t get fooled by its high dividend. With the risk of, at best, continued anemic share-price performance, and at worst, a big correction on any sort of dividend cut, there are better telecom plays out there than AT&T stock.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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