Why the AT&T Super-High Dividend Yield Still Seems Safe

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It’s no secret that investors love dividends, but what investors really cherish is when a company has a high dividend yield and is able to keep growing that payout over time. AT&T Inc. (NYSE: T) has what might be considered a shockingly high dividend yield. After all, a yield over 6% at the same time that the 10-year and 30-year Treasury yields are less than 3% has to imply some sort of risk.

In any dividend analysis of AT&T, it has to be considered that Verizon Communications Inc. (NYSE: VZ) currently yields 4.22%. While that is a massive dividend on its own, it implies that AT&T investors are casting a live vote on the current share price demanding that the company has a higher payout than Verizon. That said, also note that AT&T stock was last seen up almost 15% so far in 2019, versus barely a 1% gain for Verizon.

24/7 Wall St. routinely looks for solid dividend and income ideas. While there may be some risks over time, AT&T’s dividend can be considered safe for the foreseeable future.

AT&T has amassed more long-term debt and other liabilities in the wake of acquiring DirecTV and Time Warner to change its entire business model. That and a lack of growth expectations have pressured its stock, and AT&T will have to invest heavily in its infrastructure along with other players that want to win in the 5G battle. Still, AT&T is valued at barely nine times expected earnings (compared with about 12 times for Verizon).

There are some macro risks and caveats to that dividend safety, but AT&T’s overall risks around a trade war are not that great, as long as the United States doesn’t go deep into a recession. AT&T shouldn’t even have to worry if gasoline prices spike higher if any conflict with Iran turns more hostile. Also aiding the story is that the U.S. Federal Reserve now might have to act faster or with greater strides in cutting interest rates.

AT&T doesn’t just greatly outyield Treasuries. It turns out that the median dividend of all constituents in the S&P 500 is roughly 1.9%, as of June 27, while the median yield of all 413 members that actually pay a dividend was just over 2.2%. AT&T’s yield is a full four points higher than all S&P 500 dividend-paying stocks!

Despite having been kicked out of the Dow Jones industrial average in recent years, AT&T has managed to continue growing its dividend each year since. Its most recent dividend hike in 2018 even continued a 35-year streak of consecutive hikes, which means it was able to do so even through the Great Recession. Of course, there are no guarantees, but AT&T’s dividend seems safe and should be able to hold up in a mild recession.

The company now has a massive balance sheet, with long-term debt stated as almost $185 billion after the acquisition of Time Warner and DirecTV. That said, AT&T’s cash flow from operations was over $43 billion before factoring in the net negatives in 2018.

Analysts also are calling for earnings per share to grow from $3.52 in 2018 to $3.56 in 2019 and then $3.63 in 2020. That suggests that the $2.04 per share annualized dividend per share should be safe for some time. Just in May of 2019, AT&T’s management said that the company expects to deleverage and retire shares simultaneously.

All things considered, Verizon has less leverage on its books and a simpler business model for investors to understand. AT&T might have a yield that is roughly two percentage points higher than Verizon, but that does not mean its dividend is at risk in the near term.

Any intelligent investor has to consider at least some longer-term risks. Investors could decide one day that they do not want to own as much debt from AT&T. If the company decides or is forced to chisel down its debt, that could worry some investors, though it is not expected just now. And there is some minimum implied regulatory risk around the AT&T acquisition of Time Warner.

While AT&T has a lower credit rating than some investors might prefer, it is still investment grade and deemed “stable” by the three major credit ratings agencies. Those current ratings are Baa2 at Moody’s, BBB at S&P and A− at Fitch.

One issue that would allow AT&T’s dividend to remain safer is if the T-Mobile and Sprint merger is allowed to proceed. That turns a four-way fight a three-way fight, creating a wireless industry with less cutthroat pricing.

Analysts also have warmed up a bit more to AT&T than they did in 2017 and the first half of 2018, and some even have upgraded their ratings. The consensus analyst price target of $33.50 from Refinitiv implies some additional upside for AT&T from its $32.85 share price.

With a current $240 billion market cap and 52-week trading range of $26.80 to $34.30, AT&T shares were above $40 as recently as 2017. Some investors may worry about the shock value of the 6.25% yield, but AT&T still is likely to raise its dividend by a small amount again later in 2019.

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