AT&T Dividend Stock Review – Can AT&T Sustain its Dividend?

AT&T has an impressive history that dates all the way back to Alexander Graham Bell in 1876. For the few that may not know, Bell was the inventor of the telephone.

I could write a whole post on its own of just the history of AT&T. If interested, I would suggest reading this web page if you are interested.

As an engineer, I’m excited that AT&T invented the transistor and also the solar cell. This is a stock review so I will spare you the boring engineering details.

Okay, I could not resist but here is a video on the transistor which brings back memories of uni but also shows how important this invention was for the digital era.

AT&T is a dividend Aristocrat with a 36 year dividend growth streak.

They are probably best known as a broadband connectivity provider but they are also a software-based entertainment provider and have marketed themselves as a modern media company.

Operating Segments

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Company Growth

AT&T has a market cap of $206 Billion and a book value per share of $24.64. Its price-to-book (PB) ratio stands at 1.17. 

Over the last 10 years revenue has increased from $124 Billion to $181 Billion as of 2019. This gives a CAGR of 3.84%. Over the last 5 years, the revenue grew at a compounded annual growth rate of 4.3%. These are certainly not figures that would wow you but if you compare it to Verizon of 2.15% over 10 years then it doesn’t look too bad at all.

While Revenue is growing, there are some concerns with Earnings, Debt, and Acquisitions. Although earnings have beat expectations over the last couple of quarters, Earnings are extremely choppy and I find it hard to get a handle on them. Free Cash Flow shows a slightly better scenario and has grown 11.90% over the last 5 years.

Debt is extremely high at $148 Billion but they have been making ground in paying this off. This debt load came as a result of the acquisitions of DirecTV and Time Warner. Time Warner may be a good growth driver going forward but the acquisition of DirecTV is questionable especially as it is reported that they may sell it for much less than they originally bought it for 2 years ago.

Dividends

AT&T is a dividend aristocrat and they have increased their dividend for 36 years in a row.

The last dividend payment was in November where AT&T paid $0.52 per share. At the time of writing the dividend for 2021 has not been announced but I am expecting $0.53 to be paid in February 2021.

Check out the below chart from IOCHARTS.IO

Payout Ratio

The Payout Ratio is a good indicator of the sustainability of dividends. I have discussed the different methods for calculating the Payout Ratio here.

It is nice to see that the dividend is covered by cash flow, However, it is a different story with the earnings payout ratio. The earnings payout ratio is currently around 107.94%. Honestly, I find it tough to understand some of the accounting but they expect some single-digit growth in earnings over the next couple of years.

The FCF payout ratio makes for much better reading and is currently around 53%. Looking at the last 10 years AT&T likes to keep the FCF payout ratio around 65% so there is some room for more dividend growth in the future.

Dividend Growth

Part of my Investment thesis is to invest in companies that show a good history of increasing dividends but also show good potential to continue to raise them. Companies that generate sustainable earnings growth often make the best dividend companies, as it is easier to lift the dividend when earnings are rising. While earnings are erratic, free cash flow has grown from $15.5 Billion in 2010 to $29.2 Billion in 2019.

Over the last 15 years, AT&T has had a relatively slow growth of 3.32% compared to the S&P 500 DGR of 7.71%. Over the last 5 years, the DGR was 2.09%, during this same period EPS grew 8.9% and the FCF grew 11%.

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Would I buy this company?

This will be broken into 6 different sections with the maximum points per section are outlined below.

Section	Max Points
Financial Strength & Future Proof	25
Management Quality	15
Dividend Quality	20
Valuation	20
Story of the Stock	15
Momentum (TA)	5
Total	100

Financial Strength and Future Proof

Income statement

When starting to analyze a companies’ financial position, I start with the income statement. I generally look through 10 years of statements where I am interested in the average growth of Revenue, net Income, and Earnings per share. Basically, I m looking to see there is a demand for a companies products, they generate profit after costs and taxes and their earnings are growing.

Revenue has grown steadily over the last 5 and 10 year period with just under 4%. Earnings as stated earlier have been choppy over the last 10 years but cash flow has also grown steadily over the last 10 years.

I also note the net profit margin and operating profit margin, over the last 10 years to ensure they are at least maintaining their margins.

In 2019 the Operating margin was 15.4% which is around the 10 year average of 15%. The net margin was 7.7% which is lower than the 10 year average of 10.51%.

While I’m on the income statement I like to compare profitability ratios against the industry from www.readyratios.com.

Balance Sheet

The next step is to analyze the balance sheet. The first step is to check how much assets and liabilities a company has and to calculate the book value, or shareholder equity.

Some of the assets may be listed as “goodwill”. If goodwill and other intangible assets are excluded from total assets when calculating shareholder equity, then you get the tangible book value.

When a company acquires another company and pays a price that is higher than the tangible book value of that company, they’ll incur a loss on their balance sheet and income statement. To avoid this problem, the acquiring company can put the difference between the purchase price and tangible book value of the acquired company on their balance sheet as “goodwill”. When ever you see an increased amount of goodwill over a number of years you can assume the company can be buying other businesses. depending on the business they bought this can be seen as a good thing.

Acquisitions

Below is the Goodwill on the balance sheet over the last 5 years from 2015.

It is no surprise that this is increasing due to the acquisitions after 2 key Acquisitions in 2015 and 2018.

• In July 2015, it acquired DIRECTV for $61.4 Billion. DIRECTV was a leading provider of digital television entertainment services in both the United States and Latin America. However, this has just been a disaster from day one. The acquisition of DirecTV happened just as the pay-TV market began to decline. Netflix, Amazon Prime, and other streaming businesses made cord-cutting a viable option for many television customers. Fast forward 5 years and we all know the success these companies had. It was recently reported that AT&T is considering offloading DIRECTV for under $20 Billion.
• In June 2018 AT&T acquired Time Warner Inc. (Time Warner), a leader in media and entertainment that operates the Turner, Home Box Office (HBO), and Warner Bros. business units. This deal provides the company access to Time Warner’s vast library of content as well as the ability to create new premium content for global audiences with AT&T’s extensive customer relationships and distribution.

Debt

At the end of 2019, AT&T had a D/E ratio of 1.73, which is higher than the industry average of 1.24. This means the company has $1.73 dollars of debt for every $1 dollar of equity. While this is usually higher than I would be comfortable with, AT&T is making inroads on paying down the debt as quickly as possible. Since the end of Q2 2020, AT&T will have refinanced or repaid $19.4B in near-term debt via make-whole redemptions, tender offers, and schedule repayments. And of that, $8.2B will reduce debt maturing within one year. Current Debt currently stands at $152.5 Billion.

Interest coverage is over 3.19 which is greater than the 3:1 ratio that I look for. The industry average is 01.74. Moody’s assigned a credit rating of Baa2 to AT&T which is an investment-grade rating with moderate credit risk.

Is the Balance sheet healthy

According to the Q3 2020 reported balance sheet, AT&T had liabilities of $59.5b due within 12 months, and liabilities of $283.0b due beyond 12 months. This is quite a significant amount of money. The net debt divided by EBITDA is how many years it would take a company to pay back its debt. Assuming that the net debt and EBITDA were held constant. At the time of writing the debt is 2.8 times EBITDA. This along with the Interest coverage above 3 is encouraging. While they are making huge inroads on paying down the debt, there are companies with far better balance sheets.

Cash Flow Statement

Operating cash flow shows how much cash a company received from operating, after expenses. For me it is good to compare this with the net Income. I am looking for the operating cash flow to be healthy and larger than net income.

Free cash flow, is the real cash profit and for me is one of the most important metrics. I like to see a company that has free cash flow equal to at least 65% of net income over the last 10 years. This ensures they have plenty of cash to keep paying us shareholders dividends. In 2019 Free cash flow was 210% of net income. The 10-year average is 159%.

Cash flow has been strong and stable over the last 10 years and grown nearly 11% a year on average.

Dividend Quaility

At current prices, and a current yield of 7.23% I have estimated that it will take roughly 15 years to reach a YoC of over 10%. The scoring metric that I use awards 5 points if it takes under 12 years to reach a YoC of 10% and 3 points in it take under 15 years.

The current yield is greater than the SP500 by over 200% which is what I require to reward full marks.

The dividend growth rate has been slow with 1.65% DGI over the last 5 years and 1.96% over the last 10 years.

Valuation

PE ratio

Looking at the current TTM PE ratio, AT&T would look overvalued at 18.91 times earnings. Historically the average pe ratio has been 13 x earnings which would give a fair value of $24.65. This would make them undervalued from a PE point of view

Dividend Discount Model

Using my multistage discount model the current estimated price is $33.36. I like to use a 10% margin of error which would still make AT&T fairly valued using the DDM model.

Discounted Cash Flow

Using a discounted cash flow model with a discount rate of 8.75% the fair value for AT&T was $41.96

Taking the average of all 3 methods, the estimated fair value of AT&T is $33.

Story of the Stock

In this section, I look at the market place in general, is it stable, can the company continue to grow? Do they Innovate and how efficient is there organisation. I also look at the overall share count, Are they reducing this over the last 5 years?

Along with acquisitions, The main question is weather or not AT&T is a 5G play. Investing in 5G infrastructure is not cheap and investment in DirecTV and WarnerMedia has caused a huge debt burden. On top of this Verizon and T-Mobile are competing hard for wireless and internet companies.

I believe in 5G from a technology standpoint (even if I don’t agree with it fully in principle). The good news from AT&T’s perspective is that their competitors have also had to spend a lot of money to build out 5G infrastructure so we are less likely to see the price wars of the 4G era. I believe that 5G will be the main driver in future years and has the potential to return AT&T to a path of growth.

While they have halted its buyback scheme, AT&T generates enough cash-flow to cover its dividend. It is hard to ignore AT&T as a pure income play in the short term with a yield of over 7%. I don’t expect growth in share price until we get a more clear picture of the impact of 5G. If they do return to the historical average of 13 times earnings then we could see a total annual rate of return of 25.51%

Tech Analysis

I call it tech analysis, but really I just check to see if there is a selling climax happening and if the stock if over-bought of oversold. Insider Buying is over $8 million in 2020 with no insider selling which is encouraging.

In this case there has been more selling than buying over the last 3 months and the RSI is 54 . The stock has rebounded around 15% from its last sell off back in july.

Recommendation

My Scoring recommendations are as follows

Recommendation	Score
Strong Buy	90 – 100
Buy	71 – 90
Hold	51 – 70
Sell	31 – 50
Strong Sell	0 – 30

Overall AT&T scored 51 out of 100 which gives them a hold recommendation. Ultimately the High Debt, Inept management, slow dividend growth, and questions over whether 5G will be a real growth driver result in the stock scoring in the low-50s.

Ironically, from a valuation viewpoint, they scored quite high and I believe that the dividend is safe.

For full disclosure, I am Long AT&T but I will not be adding to any position in the near future.

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