AT&T No Dividend Increase In December: What’s Happening?

This Dividend Aristocrat is among retirees’ favorite stocks. However, AT&T (T) has disappointed millions of shareholders by not increasing its dividend last December.
No dividend growth, high yield, those are red flags. An absence of dividend growth is the first step toward a dividend cut. Should you love or hate this 7%+ yielder?
Let’s review the business and discuss how safe the dividend is!

Business Model

Wireless communication remains AT&T’s largest business, contributing nearly 40% of revenue. As the second-largest U.S. wireless carrier, AT&T connects more than 100M devices, including 63M postpaid and 16M prepaid phone customers. The consumer and entertainment segment (about 25% of revenue) includes the consumer fixed-line and DirecTV satellite television businesses, serving 20M television and 14M Internet access customers. WarnerMedia now contributes a bit less than 20% of revenue with media assets that include HBO, the Turner cable networks, and the Warner Brothers studios.

Investment Thesis

AT&T doesn’t need a presentation. It is the largest telecom in the world by revenue. With over $200B in revenue, a 7% yield, and a long dividend growth history, the big T is a favorite among income seekers. Really, what’s not to love? Unfortunately, we can fairly say that the stock’s performance hasn’t impressed anyone in the past 5 years. Even by including its juicy dividend payout, T’s investment return lags the market. The problem is that T requires significant cash flow to shift its business (find growth vectors), expand its 5G network, and continue rewarding its shareholders. Considering the low stock price, T’s cash flow generation capacity, management’s focus on paying down debt and improving its streaming offerings, we see T as a great addition to anyone’s portfolio for 2021.

Potential Risks

There are a few reasons why AT&T offers such a high yield. First, the company must generate lots of cash flow to support new technologies (5G deployment), maintain dying technologies (wired lines), pay down its huge debt, and rewarding generously their shareholders. AT&T will also deal with customers whose budgets have been hurt by COVID-19. AT&T is also trying to sell DirecTV as this division has nowhere to go. This was a terrible acquisition. This is not a perfect solution, but the stock is priced accordingly.

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