(Published by Bob Ciura on April 27)
AT&T Inc. (T, Financial) is one of the most tried-and-true dividend stocks in the S&P 500. It has increased its dividend for 33 years in a row.
The company is a Dividend Aristocrat, a group of 51 stocks in the S&P 500 with at least 25 consecutive years of dividend increases.
You can see the entire list of Dividend Aristocrats by clicking here.
AT&T recently released mixed first-quarter earnings.
The company met analyst estimates on earnings per share and benefited from strong customer additions in wireless.
At the same time, AT&T came up short on quarterly revenue and saw a significant uptick in postpaid customer losses.
The good news is while competition is heating up, AT&T has the financial resources to adapt to the changing environment.
We will discuss AT&T’s first-quarter performance and why it remains a high-quality dividend stock.
Quarterly performance overview
Among the highlights from AT&T’s first-quarter performance:
- Revenue: $39.37 billion
- Earnings per share: 74 cents
- Wireless network additions: 2.7 million
AT&T’s EPS matched analyst expectations, while revenue fell short by about $1.16 billion. This was a considerable miss on revenue.
In the same quarter of 2016, AT&T reported EPS of 72 cents on revenue of $40.5 billion. So while AT&T’s quarterly revenue declined 2.8% year over year, EPS increased by 2.8%.
Source: Q1 Presentation, page 5
One reason for the declining revenue was low equipment sales, including weak phone sales.
The company successfully cut costs to grow earnings, however. Another bright spot was AT&T’s stronger-than-expected wireless network additions.
AT&T’s 2.7 million wireless adds last quarter came in well ahead of the 2.08 million analysts had expected.
An area of concern for AT&T, however, is that it lost 191,000 postpaid phone subscribers in the first quarter. That said, the company still fared much better than its major competitor Verizon Communications (VZ, Financial), which lost 289,000 postpaid wireless subscribers in the first quarter.
AT&T is facing fierce competitive threats from all sides.
Not only have its wireless competitors moved to offering margin-eroding unlimited data, but Comcast (CMCSA, Financial) recently announced it will soon begin offering its own wireless service.
This is one of a number of competitive threats facing AT&T. But even though the first quarter was a difficult one for the company, its growth catalysts remain intact.
Growth prospects
The Comcast announcement could be a real threat to AT&T—Comcast is a major competitor in the cable TV and internet business. It has a market capitalization of $185 billion, which means it possesses the financial resources to quickly scale its wireless service nationwide.
Comcast offering its own wireless service could entice a large portion of its nearly 25 million broadband customers to switch over from AT&T and Verizon.
Not only that, but AT&T is seeing pressure in its cable TV business from cord-cutting. Consumers are increasingly cancelling their high-priced cable bundles in favor of lower-priced internet streaming services like Netflix (NFLX, Financial) and Hulu.
This could continue to put pressure on AT&T’s subscriber numbers.
In response, AT&T is pursuing growth through acquisition. It intends to acquire media giant Time Warner (TWX, Financial) for more than $100 billion.
Source: Time Warner Acquisition Presentation, page 6
Together, the new AT&T would have 144 million worldwide mobile subscribers and another 45 million worldwide video customers.
Another challenge for AT&T is the rise of "skinny" bundles, which are becoming popular with consumers who want a smaller number of cable channels in exchange for lower monthly bills.
AT&T has responded aggressively here as well. It launched its own over-the-top TV service called DirecTV Now, which racked up more than 200,000 customers in the first month after its November 2016 launch.
International growth is an additional catalyst for the company up ahead.
Source: Q1 Presentation, page 7
In the first quarter, international revenue increased 12% year over year, driven largely by gains in Mexico and Latin America. This is due primarily to the acquisition of DirecTV. AT&T now has 12.6 million subscribers in Mexico.
Lastly, 5G rollout will be a growth catalyst for AT&T. The company’s strong network could provide it with a competitive advantage once 5G goes nationwide.
To supplement its efforts in 5G, AT&T has a pending agreement to acquire Straight Path Communications (STRP, Financial) for $1.6 billion. Straight Path holds and leases significant amounts of fixed wireless spectrum in the U.S., which will be critical for carriers offering 5G.
AT&T, however, was recently informed that another multinational telecom provider made a superior bid for Straight Path. The company is now in the process of evaluating whether it wants to raise its bid, which is something investors should keep an eye on.
AT&T expects full-year 2017 adjusted EPS to increase in the mid-single-digit range. Free cash flow is expected at $18 billion, which would represent a year-over-year increase of 6.6% from 2016.
This should easily allow AT&T to pass along another modest dividend increase in 2017.
Dividend analysis
Even though AT&T’s wireless subscriber numbers are falling, the company is still a cash cow.
Last year, revenue increased 12% to $168 billion. AT&T generated free cash flow of $16.9 billion, up 7% year over year.
For 2016, AT&T’s dividend took up roughly 70% of its free cash flow. For the first quarter, cash from operations and free cash flow were $9.2 billion and $3.2 billion, respectively.
This means AT&T’s dividend payout is comfortably covered by cash flow. The company has a current annualized dividend payout of $1.96 per share, which currently provides a hefty 4.8% dividend yield.
For the past nine years, AT&T’s dividend increases have been in the amount of one cent per share quarterly.
Investors should expect this pattern to continue, at least for 2017. This is another year of significant investments for AT&T in response to rising competitive threats.
As a result, it is likely the 2017 dividend raise will be another penny, which would bring the quarterly payout to an even 50 cents per share.
Over the long term, investors should generally expect AT&T’s dividend growth to be in the low single-digits, most likely mirroring the rate of inflation. Still, even low dividend growth is better than no dividend growth at all.
Final thoughts
AT&T is not backing down from the competition. Comcast is about to enter the wireless space while other industry players are rolling out unlimited data plans and skinny bundles.
This may continue to cause some fluctuation in AT&T’s quarterly performance up ahead, but the long-term outlook is still positive.
AT&T has several growth catalysts moving forward, including 5G, the Time Warner acquisition and international growth.
Plus, the company generates huge free cash flow, which secures its hefty 4.8% dividend yield. This means AT&T is still a very attractive stock for dividend investors.
Disclosure: I am not long any of the stocks mentioned in this article.
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