AT&T (T): High Yield And Improving Dividend Safety

AT&T (T) is well known as an income stock and a dividend growth stock. The current high yield of AT&T is attractive, and the dividend safety is now improving since management is making a serious effort to pay down debt. The current yield is over 7%. The dividend has been raised for 36 consecutive years making AT&T a Dividend Aristocrat and Dividend Champion. The payout ratio is roughly 65% but was higher immediately after the Time Warner acquisition. Other dividend safety metrics were also concerning from the perspective of a dividend growth investor. AT&T took on an enormous amount of debt to acquire Time Warner. The company must reduce leverage and execute well in the face of the COVID-19 pandemic. The pandemic is negatively impacting the top and bottom lines and cash flow. This combined with long-term subscriber losses in the satellite television business and lower revenue in the Warner Media business means that 2020 and possibly 2021 will be a challenging year. Though there are challenges, investors may want to take another look at AT&T since the yield is high, total and net debt is coming down, and dividend safety is improving. Total return for AT&T may be solid if the company can execute well.

AT&T High Yield and Improving Dividend Safety

AT&T (T): High Yield and Improving Dividend Safety

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Overview of AT&T

AT&T traces its history back to 1874 when Alexander Graham Bell created Bell Patent Association. In modern times, consolidation of the telecommunication industry-led SBC Communications, a baby bell (former spin out of AT&T), to acquire AT&T Communications in 2005 forming the modern-day AT&T Inc. SBC took the name of AT&T. Today AT&T is the largest communications company in the world based on revenue. AT&T operates through three business segments: Communications, Warner Media, and Latin America. AT&T acquired Time Warner for $85 billion in 2018. Communications is comprised of Mobility, Entertainment Group, and Business Wireline. Warner Media consists of Turner, Home Box Office, and Warner Bros. Latin American includes Mexico and Vrio. 

The largest segment by revenue (40% of total revenue) and most important is Communications due to the wireless business. This business has approximately 100 million connections. In wireless, AT&T shares an oligopoly with Verizon (VZ) and T-Mobile. The three companies have a combined market share of 90% postpaid and prepaid customers in the U.S. Entertainment Group (20% of total revenue) includes DirecTV, U-verse, AT&T TV, and broadband. This segment has about 20 million television and 14 million internet access customers. The Business Wireline unit (14% of total revenue) is important but less profitable than the other units in the segment. Warner Media is the newest business and accounts for 20% of total revenue. Latin American is the smallest business (3% of total revenue) and includes satellite TV and wireless in Mexico. Total revenue was approximately $181 billion in 2019.

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