Can't Sleep Because of Your AT&T Investment?
- By Mark Yu
When a more than century-old company known for its consistent shareholder dividends cuts its quarterly payouts to just a penny a share, reviewing similar and supposedly reliable dividend-providing companies should come to mind.
Brought on by its difficulties in generating enough cash flow, General Electric (GE)'s payout reduction has mostly been anticipated by investors. By the time it announced its dividend cut -- only its second since the Great Depression -- GE's shares yielded 4.75%.
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AT&T (NYSE:T), on the other hand, currently has a very juicy dividend yield of 6.4%.
Unlike GE, AT&T has kept the same CEO since 2007, has steadily increased its dividend per share throughout the years, and has just received approval for its mammoth acquisition of Time Warner for $85 billion.
Still, the 6.4% payout is fairly within the ranks of junk bond yielders and warrants a little more scrutiny so as to determine whether trimming a portfolio's exposure is a good idea.
What AT&T demonstrated in its recent nine-month operations report indicated a steady, growing telephone and multimedia giant. It delivered 3.3% revenue growth to $122.8 billion for its year-to-date operations, making it the largest revenue-generating telephone company in the U.S.
In the same period, AT&T ended up with $183 billion in debt, which makes investors a little wary of its cash flow state in the coming future.
Not to worry, this is exactly what AT&T addressed in its recent update to its 2019 guidance.
In its guidance, the company said that it sees its free cash flow -- cash flow from operations minus capital expenditures -- being in the $26 billion range, and that it would have a solid dividend payout ratio in the high 50% range.
Parsing through its historical performance, the $26 billion range for its free cash flow figure would indicate more than doubling its five-year average free cash flow growth rate, while the high 50% payout ratio would be more than 10 percentage points lower than what it has been accustomed to in the past half-decade period, which are all good signs and in favor for dividend investors.
All these positive expectations are a result of its integration of its recent major Time Warner acquisition.
AT&T also expects to trim down its debt by $18 billion to $20 billion in 2019 resulting in a debt-to-adjusted Ebitda ratio of 2.5x range compared to 2.8x this year.
Meanwhile, not everything is appealing so far as a result of AT&T's acquisition and operations.
AT&T recorded a 34% rise or $1.47 billion increase in interest expenses year to date as a result of its large debt. Subtracting from that its other income sources, the income before tax figure was lower by a percentage point from a year ago.
In addition, the company's communication business, which represented 87% of revenue year-to-date, also has experienced 3.7% decline.
Should its guidance play out, 2019 would be a turnaround year whereby AT&T, for the first time, would be reducing its overall debt instead of adding more, which it had gotten used to doing in a little more than the past decade.
If anything, it may still be a good idea to trim some of a portfolio's exposure to AT&T to procure sleep. Regardless, the company will still most likely be a reliable dividend provider in the coming year.
Disclosure: Long AT&T.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 4 Warning Signs with T. Click here to check it out.
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