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Watch AT&T’s acquisition-related debt

The outlook for the US’s largest and highest-paying dividend stocks
April 11, 2019
  • Dividend policy: “Our dividend policy considers the expectations and requirements of stockholders, capital funding requirements of AT&T and long-term growth opportunities. It is our intent to provide the financial flexibility to allow our board of directors to consider dividend growth and to recommend an increase in dividends to be paid in future periods.”
  • Forward yield: 6.28 per cent.
  • Payment: Quarterly.
  • Last cut: The company has raised its quarterly dividend for 35 consecutive years.

AT&T (US:T) has lifted its quarterly dividend for 35 years in a row. This lands it firmly on index provider S&P 500’s ‘Dividend Aristocrats’ register, which only requires 25 years’ worth of consecutive increases. Such incremental payouts are, ostensibly, good news for income-seeking shareholders – as is the group’s huge forward dividend yield of 6.3 per cent.

But a yield so high can also ring alarm bells – potentially reflecting concerns among investors about the likelihood of a cut. Confidence in the stock did appear to wane in 2018; the shares declined by around a quarter from January to December. That said – perhaps reflecting improved sentiment – they are up by around 8 per cent since the start of 2019.

In any case, there are reasons both to question, and to have faith in, the sustainability of AT&T’s returnsto shareholders. Central to the debate is its $85bn takeover of content giant Time Warner, which completed last June – having finally received approval.

On its own, AT&T was a telecoms behemoth and the world’s leading provider of pay TV. 

Thanks to the acquisition, it now has media and entertainment companies Warner Bros (of Harry Potter fame), HBO and Turner (comprising various cable networks) in its stable. But it also has a mountainous debt pile. As at the end of 2018, net debt sat at $171bn – up from $114bn a year earlier.

Still, free cash flow came in at $22.4bn, easily underpinning the group’s total $13.4bn dividend payment ($2.01 a share). In 2019, it plans to inject around $23bn into “growth areas”. But even after this, it is guiding towards free cash flow of roughly $26bn, which will be put towards paying down the acquisition-related debt and delivering a “steady, consistent dividend”. The group’s outlook for this year includes a dividend payout ratio in the high 50s per cent of free cash flow, and an (adjusted) year-end net-debt-to-cash-profits ratio of around 2.5 times.

These are somewhat encouraging targets. But, as with any company, we should consider other possible drags on cash. For one thing, AT&T’s largest business by operating revenues is communications. And while the ‘mobility’ sub-segment returned to growth in 2018, the roll-out of fifth-generation (5G) wireless is a factor worth bearing in mind.

Broker JP Morgan says that spectrum costs could ultimately be higher than anticipated; while the group has focused on densification – “which is also not a cheap alternative”; analysts here note that “we could see spectrum purchases”.

AT&T     
Ord Price: 3,198¢ Market Value: £233bn  
Touch: 3,197¢-3,198¢  12M High: 3,639¢Low: 2,680¢  
Forward Dividend Yield: 6.5% Forward PE Ratio: 11  
Forward Net Asset Value: 2,662¢ Net Debt: 46%  
Year to 31-DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201616421210192
201719314.2305197
201818626.4352201
2019*18528.2282205
2020*18729.3294209
% change2442
Matched bargain tradingBeta: 0.86   
*JPMorgan Cazenove forecasts