Blue Chips

Studying AT&T Stock; 5% Dividend

AT&T Stock has raised its dividends for 35 consecutive years making it a prime member of the S&P 500 Dividend Aristocrats. The dividend aristocrats are companies that have raised dividends every year for at least 25 years.

Management last raised its dividend from $0.51 to $0.52 per share to be paid on February 3rd, 2020. AT&T is a high yield dividend stock with a payout of more than 5%.

In this article, we review AT&T’s latest financial results, operating segments, dividend growth history and performance versus the S&P 500.

Business Synopsis

AT&T is the world’s largest telecommunications company founded in 1885 by Alexander Graham Bell. AT&T stands for American Telephone & Telegraph Company.

The company is a communications powerhouse with 170 million direct to consumer relationships across wireless, pay-TV and broadband businesses in the United States and Mexico.

Headquartered in Dallas, Texas, AT&T employs 268,000 people and reports financial results across 4 segments:

Segment #1: Communications – This segment provides over 100 million US customers with broadband, pay-TV and wireless connections as well as smart plans to 3 million business customers.

Segment #2: WarnerMedia – WarnerMedia produces television shows and channels like HBO, CNN, TNT, TBS, Cartoon Network and Turner Classic Movies.

Segment #3: Latin America – Latin America Segment provides television channels in 11 countries and wireless connectivity in Mexico.

Segment #4: Xandr – Xandr is a newly added segment that provides advertising technology to customers, data analytics and ad inventory to advertisers across AT&T’s vast content network.

AT&T Stock trades on the New York Stock Exchange under the ticker T. It has a market capitalization of $287.9 billion as of November 2019. The current dividend yield is 5.2%. This yield is 330 basis points higher than the yield provided by the S&P 500.

Revenue Analytics & Share Buybacks

For fiscal 2018, AT&T generated $170.76 billion in revenues, earning a net income of $19.95 billion. This implies a net profit margin of 11.7%. Operating revenues grew 6.3% year over year from 2017’s $160.55 billion.

Communications is the largest segment with revenues of $144.63 billion, making up  84% of the total pie. This was down from $150.378 billion in 2017. Reasons for the decline are shift in consumer behavior, deactivation of legacy wire line products  increased competition.

AT&T completed its WarnerMedia acquisition in June 2018, adding revenues of $18.941 billion.

Latin America makes up 4% of total revenues, generating $7.652 billion in sales. This was down 7.5% year over year from 2017’s $8.269 billion.

Xandr is the smallest business at 1% of total revenues but the fastest growing at 26.7% year over year.

The bread and butter of AT&T’s business is Mobility as the company defines it. AT&T was recognized as the #1 Wireless Network in America in 2018. 2018 revenues for this segment amounted to $71.3 billion which equals 42% of the company’s entire revenues.

  • Total Wireless subscribers grew from 141.2 million in 2017 to 153 million in 2018, a healthy 8.4% growth.
  • The company experienced healthy growth in operating income margin from 28.4% in 2017 to 30.4% in 2018.
  • Connected devices grew 31.7% from 38.99 million subscribers in 2017 to 51.34 million subscribers in 2018. This was due to strong growth in connected cars and Internet of Things.
  • AT&T plans to capitalize on this growth through partnerships with more automobile manufacturers and car owners.

Management Guidance & Growth Outlook

How is the company doing as of its 3rd reported quarter end October 28th, 2019?

  • AT&T generated $134.4 billion in revenues year to date as of Oct 28th, 2019, a drop of 0.9% from 2017 when it generated $135.37 billion in revenues.
  • Growth in wireless services revenues and WarnerMedia has offset declines in its legacy landline telephone business, foreign exchange losses as a result of stronger US dollar as well as decline in video services.
  • Wireless service revenues are up 1.9% year to date. The company grew its wireless subscribers by adding 101,000 postpaid users, 154,000 prepaid users and 317,000 smartphone users.
  • In the Entertainment group, Fiber Internet connections grew by 318,000 users and IP broadband revenues grew 3.5% year to date. Consumers are taking advantage of AT&T’s offer of 6 months free Spotify Premium subscription and Roku’s streaming stick when customers buy a Fiber Internet contract.
  • From 2020 to 2022, management expects compounded annual revenue growth rate (CAGR) between 1 to 2%.
  • It expects subscriber growth from FirstNet which is America’s first public safety information platform. The company also expects subscriber growth from HBO Max, a new streaming service that airs hit Hollywood movies before other networks do, as well as documentaries, and HBO series.

  • AT&T’s Average Revenue per User (ARPU) increased from $55.58 in 3rd quarter 2018 to $55.89 in 3rd quarter 2019, a growth of 0.6%.
  • The company has 162.3 million subscribers in its Mobility division as of 3rd quarter 2019.
  • The Entertainment Group is seeing declining premium TV subscribers, losing 1.16 million subscribers in 3rd quarter 2019 due to competitors like Netflix and YouTube.
  • However, the company is expected to launch HBO Max streaming services in May 2020 to compete with Netflix and Disney’s new streaming services.

Dividend History, Sustainability and Payout Ratio

AT&T paid its first dividend in 1984 and has raised them consecutively for 35 years, making it a dividend aristocrat. Dividend Aristocrats are companies that have raised their dividends every single year for at least 25 years, are included in the S&P Index and have a market capitalization of at least $3 billion.

AT&T has grown its dividend from $49 cents in 1985 to over $2.04 in 2019, a very healthy 416% growth in 34 years. Below is a chart showing the steady uptrend in dividend payments from the company.

Below is a chart showing the company’s steady and positive dividend growth year over year in percent terms. Since the great financial crisis in 2009, the company has grown its dividend at a steady 2% annual clip per year, to keep up with inflation.

Also note that the dividend yield on AT&T’s stock is already more than 5%, so a 2% annual growth in dividend payments is very healthy.

Measuring the Dividend Payout Ratio for AT&T (T)

AT&T is a dividend aristocrat as mentioned in the above section. How awesome is it to be able to invest in shares of your family’s phone and data plan or pay-TV provider, and collect dividend checks for many years.

It is prudent for investors to check the dividend payout ratio of each company they own, in order to make sure dividends are paid from incoming free cash flows which are growing and sustainable.

Lets examine the the dividend payout ratio for AT&T. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends. Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In AT&T’s 2018 annual report, this is a quote from the company. “AT&T is not only growing today but is also well-positioned for the future. In 2019, we plan to invest about $23 billion of capital into our growth areas. Even after making those investments, we expect to generate free cash flow in the $26 billion range this year.  After paying more than $14 billion in dividends, we expect to have about $12 billion of discretionary cash flow. And that cash flow is earmarked for paying down our debt from the Time Warner acquisition. We’ll be at a more comfortable net debt-to-adjusted EBITDA ratio in the 2.5x range by year-end 2019, and we will continue to de-lever after that.”

Free Cash Flow for 2018 = $26 billion

Dividends Paid in 2018 = $14 billion

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

Dividend Payout Ratio = $14 billion / $26 billion

Dividend Payout Ratio = 54%

A dividend payout ratio of 54% is sustainable and means the dividend will grow over time as the company is committed to rewarding shareholders. Management has also stated that they will use the other $12 billion of discretionary cash flow to pay down debt as a result of the Time Warner acquisition.

Performance of AT&T (T) Stock over the Long Term

Below is a long term monthly chart of AT&T with the ticker symbol T. The stock has grown from $5.24 in January 1984 to $38.50 as of November 2019, a growth of  734% over 35 years. This results in a compounded annual growth rate (CAGR) of 5.9%. It is important to note that AT&T traded as high as $60 during the great technology bubble of 2000. The stock dropped to $20 in 2003 and has since topped out at less than $45 ever since.

AT&T Stock Performance and Valuation versus S&P 500 and XLC

As of November 2019, AT&T stock is up 38% year to date, versus the S&P 500 which is up 22.2%. The S&P 500 trades at a forward price to earnings ratio (Forward P/E) of 17.5 times while AT&T trades at a forward p/e of 11 times earnings, which is quite cheap.

How are we making this calculation? For the full year 2019, AT&T is expected to generate earnings per share of $3.56. Current AT&T stock price is $39.38 as of the time of this writing. Therefore:

Forward Price to Earnings Ratio = Stock Price / Forward 12 Months Earnings per Share

Forward P/E = $39.38 / $3.56

Forward P/E = 11 times earnings

As a comparison, the S&P 500 Communications Services Index (XLC) trades at a forward price/earnings ratio of 21.8 times earnings.

Has AT&T (T) Under Performed the S&P 500 over 10 Years?

Below is a chart showing the performance of AT&T stock versus the S&P 500 index. The S&P 500 Index is America’s best blue chip companies that have excellent credit ratings, ample cash & liquidity, diversified global revenues and brands.

As of November 2019, AT&T stock is up 162.21% over the last 10 years, versus the S&P 500 which is up 189.26%. This is an under performance of 27%. We can study from the chart that AT&T stock outperformed the S&P 500 much of the time up until middle of 2017 when news surfaced that AT&T is about to acquire Time Warner Inc. The size of the deal was $85 billion.

Executive Summary

Here is what we like and don’t like about AT&T stock.

Likes
  • Trades at a forward price to earnings ratio of 11 which is very cheap.
  • High dividend yield of 5.2%, versus the S&P 500 Index which has a dividend yield of 1.9%.
  • Growing dividends at 2% annually.
  • Dividend payout ratio of just 54% leaving room for future dividend raises.
  • Fast growing businesses like HBO Max, Xandr, First Net as well as growth in wireless subscribers.
Dislikes
  • Huge long term debt of $166.25 billion which is costing the company billions in interest.
  • DirecTV is losing subscribers in the US and Mexico due to competition from Netflix, YouTube and growth in smartphones usage.
Market Capitalization $287.67 billion
Dividend Yield 5.2%
Forward PE Ratio 11 times earnings
Dividend Growth (5 Year Avg.) 2.09%
Dividend Payout Ratio 54%
EPS Growth (3 Year Avg.) 5.06%
2018 Revenues $170.76 billion
Gross Margin 53.5%
Net Margin 11.7%

 

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