This dividend aristocrat is one of retirees’ favorite stocks. However, AT&T (T) disappointed millions of shareholders by not increasing its dividend last December.
No dividend growth, high returns, these are red flags. The absence of dividend growth is the first step towards a dividend cut. Should you love or hate that 7% + return?
Let’s review the deal and discuss how safe the dividend is!
Wireless communications are still AT & T’s largest business, accounting for almost 40% of sales. As the second largest US wireless operator, AT&T connects more than 100 million devices, including 63 million postpaid and 16 million prepaid telephone customers. The consumer and entertainment segment (approx. 25% of sales) comprises the consumer fixed-line network and the DirecTV satellite television business, which serves 20 million television and 14 million Internet access customers. WarnerMedia now accounts for a little less than 20% of revenue from media resources, which include HBO, the Turner Cable Networks and the Warner Brothers studios.
AT&T does not require a presentation. It is the top-selling telecommunications in the world. With revenue of over $ 200 billion, a yield of 7%, and a long dividend growth history, the big T is a favorite among income seekers. Really, what is there not to love? Unfortunately, we can rightly say that the stock’s performance over the past 5 years has not impressed anyone. Even including the hefty dividend payout, T’s return on investment falls short of the market. The problem is that T will need significant cash flow to relocate its business (find growth vectors), expand its 5G network, and keep rewarding its shareholders. Given T’s low stock price, cash flow generating capacity, management’s focus on debt settlement, and improving its streaming offerings, we see T as a great addition to anyone’s portfolio for 2021.
There are a few reasons AT&T offers such a high return. First, the company needs to generate a lot of cash flow to support new technology (5G deployment), service dying technologies (wired lines), pay off its enormous debts, and generously reward its shareholders. AT&T will also look to customers whose budgets have been impacted by COVID-19. AT&T is also trying to sell DirecTV as that division has nowhere to go. This was a terrible acquisition. This is not a perfect solution, but the stock price will be valued accordingly.
Dividend growth perspective
At first glance, T’s dividend profile looks very good. High yield with constant increases sounds perfect. However, given the dividend growth rate, things are far from perfect. Over the past ten years the annualized dividend growth rate of T 2.21%. In the last 5 years it has fallen to 2.12%. T didn’t increase its dividend in 2020, which is cause for concern. We expect the company to pay off debt and invest in HBO streaming services. If that’s their plan, we can forgive a hiatus for dividend growth for a year or two.
Is the dividend safe?
If they look at the payout ratio, dividend investors will start running (around 135%)! However, with the growth of T according to the acquisition model, this is only normal. In this case, the payout ratio says a lot more and looks healthy at 53%. Cash flow is also very strong with a CFFO of $ 45 billion and debt is slowly falling. I continued my analysis in the video below. Still, you can still consider the dividend safe.
Strangely, I hated AT&T for its low returns, higher debt, and risk. I still don’t hold the stock, but there are many positive things about the company, including the fact that it’s an ATM as a dominant player in the wireless industry.
Telecom needs to increase its dividend in 2021 to keep its title of dividend aristocrat. A dividend cut would be catastrophic. Management would have to have serious problems to go this route. Given AT & T’s metrics and business model, I very much doubt this would happen. You can sleep well; I am confident that AT&T will increase its dividend next December.
For the first time since 2012, I’ve even included T in my annual top picks!
You can download 6 of my top 20 for 2021 here: