AT&T (T) – Big Dividend Cut

AT&T (T) is a dividend growth stock that many people own due its consistency in paying a dividend and high yield with improving dividend safetyAT&T’s dividend yield has been over 7%. The stock is a Dividend Aristocrat. However, revenue and earnings growth has been difficult to come by. The company tried to grow through two major acquisitions. AT&T acquired DirecTV in 2015 for $67 billion including debt. AT&T then tried to turn itself into a content provider by acquiring Time Warner in 2018 for $85 billion. But arguably capital allocation has been poor and both acquisitions failed to provide value to shareholders. AT&T is now trying to undo the acquisitions by spinning off DirecTV and WarnerMedia. There are benefits to AT&T but there are costs as well. More on that below. However, shareholders of AT&T will experience a big dividend cut  that was largely unexpected.

AT&T - Big Dividend Cut

Overview of AT&T

AT&T traces its history back to 1874. The current incarnation of AT&T is a result of consolidation in the telecommunication industry. SBC Communications, a former spinoff of AT&T, acquired AT&T Communications in 2005 forming the modern-day AT&T Inc. SBC took the name of AT&T. AT&T acquired DirecTV for $67 billion in 2015 and three years later acquired Time Warner for $85 billion in 2018. Today AT&T is the largest communications company in the world based on revenue. AT&T operates through three business segments: AT&T Communications, WarnerMedia, and AT&T Latin America. AT&T Communications is comprised of Mobility, Consumer Wireline, and Business Wireline. WarnerMedia consists of Turner, Home Box Office, and Warner Bros. AT&T Latin America includes Mexico and Vrio. 

The largest segment by revenue (81% of total revenue) and the most important is AT&T Communications. The Mobility business has approximately 100 million connections and $72.6 billion in revenue. In wireless, AT&T shares an oligopoly with Verizon (VZ) and T-Mobile (TMUS). Consumer Wireline has about $12.3 billion in revenue and includes DirecTV, U-verse, AT&T TV, and broadband. This segment has about 17 million television and 14 million internet access customers. The Business Wireline unit has about $25.1 billion in revenue. Warner Media is the newest business and accounts for 18% of total revenue at $30.4 billion. Latin American is the smallest business at roughly 3% of total revenue or $3.2 billion and includes satellite TV and wireless in Mexico. Total revenue was approximately $171.8 billion in 2020.

Spinoff of DirecTV

DirecTV was acquired by AT&T in 2015 for $67 billion including debt. The original idea was for AT&T to market satellite TV with its wireless service as a bundle. But AT&T missed the dramatic changes occurring in the market as broadband speeds became faster and streaming services took hold. Consumers preferred to watch Netflix (NFLX) over broadband rather than DirecTV, a pay televisions service. Additionally, the onset of 5G made streaming movies and TV shows over cellular much easier and faster. The reality was that people don’t want the hassle of dealing with a small satellite dish. AT&T lost over 3 million subscribers in 2020 alone as the number of streaming services increased and cord cutting accelerated. DirecTV’s subscribers peaked in 2015 when the service combined with U-verse had 25.4 million subscribers in total. This number is down by over one-third to about 17 million at end of 2020.

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