Telecom & Wireless

Holding Its Dividend Will Keep AT&T's Stock Safe

Chris Lange

Published: May 5, 2020 11:28 am

The COVID-19 pandemic has pushed investors to search out companies with strong balance sheets and safe dividends to weather this storm. AT&T Inc. (NYSE: T) historically has paid one of the most solid dividends in the stock market, along with its rival Verizon Communications Inc. (NYSE: VZ). However, COVID-19 has changed the game and put many companies on their heads, giving rise to questions of financial security.

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AT&T has fared worse than the S&P 500 over this past quarter, but there are a couple of things to dissect here. The S&P 500 largely has been bolstered by tech giants Apple, Microsoft and Amazon, while most of the index is still very much struggling. One thing that AT&T offers that these tech giants, or practically all the S&P 500, do not is its dividend.

The question for investors is where AT&T’s dividend stands now. Should investors be worried that AT&T’s cost savings measures might cut into the dividend in the near or long term?

Background

For those late to the party, note that AT&T is the largest U.S. telecom company and provides wireless and wireline service to retail, enterprise and wholesale customers. The company’s wireless network serves approximately 124 million mobile connections, with 77 million postpaid subscribers. Basically, this company provides telecom services to millions of people, mostly in North America.

AT&T’s traditional wireline voice business has undergone a period of secular decline due to wireless substitution and cable competition. Through WarnerMedia, the company has become a diversified media and entertainment business with its TV services, which include live sports and more.

Earnings

AT&T reported its first-quarter earnings results late in April. The telecom giant posted $0.84 in earnings per share (EPS) on revenues of $42.8 billion, which compares to what analysts were calling for: $0.85 per share and $44.2 billion. In the same period a year ago, the company reported EPS of $0.86 on revenues of $44.8 billion.

Randall Stephenson, the board chair and chief executive, said that the coronavirus pandemic cost AT&T’s earnings $0.05 per share. Without that hit, the quarter produced “strong wireless numbers that covered the HBO Max investment, and produced stable EBITDA and EBITDA margins.”

Citing uncertainty related to the COVID-19 pandemic, AT&T withdrew its fiscal-year guidance. Back in January, the company had forecast EPS in the range of $3.60 to $3.70 and revenue growth of 1% to 2% for the full year. Consensus estimates currently call for $3.23 in EPS and $170.91 billion in revenue for the year.

The company reported 163,000 net postpaid wireless subscribers and a six-basis-point decline in churn among postpaid consumers. Service revenues rose by 2.5%, and operating income was up 9.0%.

In the company’s entertainment group, AT&T lost 897,000 premium TV subscribers but posted 209,000 Fiber net additions. Broadband revenue rose by nearly 2%.

Dividend

Note that the stock price has fallen significantly from its highs, and this telecom giant is supposed to be one of the safer companies for income investors. The fear was that AT&T’s dividend might be under pressure, as the company has vast debt at a time when the value of Time Warner would not be much lower than when it was acquired. According to AT&T, that just isn’t the case.

AT&T’s COVID-19 update in early April showed that the company is financially strong with a healthy balance sheet and ample liquidity. On the books, AT&T had roughly $12 billion in cash at the end of 2019, and since that time, it issued about $4 billion from preferred stock issuances in February, which also came at lower yields than it pays on its common stock.

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While AT&T executed a $4 billion accelerated stock buyback plan in March of 2020, the company has canceled that plan, which was to be conducted during the second quarter.

In terms of its operating businesses, these are also expected to support the dividend payments and to keep on track of retiring debt. AT&T expects to bring in roughly $2 billion later this year from its already announced divestiture of CME and additional capital coming in as it monetizes its stakes in real estate and towers. Separately, the firm anticipates closing the sale of its Puerto Rico and U.S. Virgin Islands operations, and the capital brought in will be used to retire an outstanding preferred interest.

The company has brought on a $5.5 billion term-loan agreement that came from 12 different banks in an effort to shore up additional capital. Also shown in the update was that it has continued access to selling commercial paper and has access to the bond markets and other financing activities that will continue under its normal financing activities.

As for the dividend, the press release said:

As it has for the past 36 years, the company looks forward to continuing to pay a quarterly dividend to shareholders. On March 27, the Board of Directors declared a dividend payable on May 1, 2020, to stockholders of record of its common and preferred shares at the close of business on April 9, 2020.

At the current share price, AT&T still pays its common shareholders a 6.8% dividend yield, which is significantly higher than at many companies in telecom, communications and media. The dividend payout ratio is 24.2%, based on cash flow, or 58.3% on a trailing 12-month basis.