AT&T (T) Dividend Stock Analysis

Description

Sector: Communication Services
Industry: Telecom Services

AT&T provides wireless and wireline telecommunication services. The company operates in the United States and Mexico to connect people and content with “advanced mobile service, next-generation TV, high-speed Internet services and smart solutions for business”.

Recent acquisitions have made AT&T a company with great promise and a riskier profile. The purchase of DIRECTV, makes AT&T the worlds largest pay TV provider stretching from the United States into Mexico and 10 other Latin American countries.
Add in the acquisitions of two Mexican wireless providers (Lusacell and Nextel Mexico) and you have a company that is expanding its reach and its balance sheet.

AT&T has to be analyzed a little differently than most companies in the Arbor database. It’s closer to a utility because it operates in an oligopolistic industry. In other words, there are few sellers giving those limited companies in the sector advantages in scale, pricing, bargaining power, etc.

The incredible amount of capital expenditures required to be in this industry keeps competitors away but debt high. So it’s a two edged sword.

SWOT Analysis

Strengths

Recent acquisitions only add to AT&T’s economic moat. Billions of dollars in capital expenditures (over 100 billion the last 5 years) make it almost impossible for new competition. AT&T and Verizon have unmatched competitive advantages in the wireless industry.

Weaknesses

Lots of debt. This company is really leveraged. This can be a big benefit if conditions are favorable or a huge problem if conditions were to deteriorate. (See my comments about the Time/Warner merger below in “Conclusion”)

Opportunities

AT&T has invested billions in acquisitions and spectrum. These investments can provide large benefits including increased revenues & profits, a larger market share, increased ability to bundle services, and substantial synergies that enable cost cutting.

Threats

AT&T’s entry into new foreign markets adds risks that haven’t been part of the mix (foreign governments, competition, a strengthening dollar). Government regulations are always a threat.

              Dividend Analyzer Checklist

                         (updated January 2017)

Dividend Safety Score (15/33 points)

Dividend Per Share (ttm):  $1.92
Dividend Payout Ratio (ttm):  81%
Dividend Per Share (10 Year Growth): 3.8%
Cash From Operations (CFO) Per Share (ttm):  $6.20
CFO Dividend Coverage (CFO / DPS):  3.2  (3/6 points)
Free Cash Flow (FCF) Per Share (ttm): $2.64
FCF Dividend Coverage (FCF / DPS):  1.4  (3/6 points)
Net Financial Debt:  $122274 M
Total Assets:  $402975 M
Net Financial Debt / Total Assets:  30%   (4/12 points)
Net Financial Debt to EBITDA (ttm):  241%
Total Liabilities to Assets Ratio (Qtr.):  69%
Piotroski Score (1-9) (TTM): (5/9 points)

Profitability & Growth Score (24/33 points)

Revenue (10 Year Growth) *CAGR > 4.14%:  12.9%  (4/4 points)
EPS Basic Cont. Operations (10 Year Growth) CAGR > 4.14%:  5.3% (4/4 points)
Cash From Operations (10 Year Growth) CAGR > 4.14%:   11.0%  (6/6 points)
Operating Earnings Yield (ttm):  10.5%   (6/7 points)
Net Income (ttm):   $14545 M
Gross Profit (ttm):   $88608 M
Total Assets:  $402975 M
Gross Profitability Ratio = GP / Total Assets:  22%   (4/12 points)
Cash Return On Invested Capital (CROIC)(tttm):  7%
Return on Invested Capital (ROIC):  6%
Return on Invested Capital (ROIC) (5 Year Median):  4%
Return on Invested Capital (ROIC) (10 Year Median):  7%

*Compound Annual Growth Rate (CAGR)
**A Compound Annual Growth Rate of 4.14% = a 50% gain over 10 years.

Valuation Score (24/34 points)

Free Cash Flow Yield (ttm): 6.2%   (7/9 points)
EV to EBIT (ttm):  13.8   (5/9 points)
EV to EBITDA (ttm):  7.1  (7/9 points)
PE10:  17.8 (5/7 points)
Price to Sales Ratio (ttm):  1.5
Price to Book Value (ttm):  1.9
Price to Earnings Ratio (P/E) (ttm):  16.5

        TOTAL POINTS – (63/100) (50 is an average score)

Conclusion

(updated January 2017)

AT&T (T) is ranked #45 (out of 246) overall and #1 (out of 6) in the Communications Sector by the Dividend Analyzer.

This is not the old AT&T for widows and orphans. Respect has to be given to its leveraged balance sheet. That being said, the fact that it operates much like a utility means you have to give some leeway because of its ability to create large amounts of cash flow.

This is a stock that may be unfairly penalized by the Dividend Analyzer. The company’s high debt and slow growth (characteristics of a utility) cause its Profitability & Growth Score, and Dividend Safety Score to be lower than perhaps it should. In addition, the Dividend Analyzer has no way of knowing anything about the acquisitions (i.e. DIRECTV) that seem to be working to the advantage of AT&T.

The acquisition of TimeWarner (TWX) could be completely different. T is paying a steep price! I don’t like it at all. While I don’t support government interference in a vertical merger; I hope the acquisition falls apart for the sake of AT&T shareholders (It’s a great deal for $TWX shareholders).

Given the fact that there are few investments available in the communications sectors; AT&T is a viable company for consideration in large diversified dividend portfolios and those seeking high income. Verizon (VZ) and AT&T are good choices for investors looking for high yield dividend stocks. Deep Value investors might want to wait for lower prices.

Type of Investor / Recommendation

Large Diversified Dividend Portfolios /  Good Option
Looking For Exposure to High Income /  Good Option
Deep Value Investors /  Possibly Buy on Dips

Portfolio Position Disclosures:
DVB Dividend Kings & Aristocrats – None
DVB Dividend Growth – None
DVB High Income – Long
Arbor Asset Allocation Model Portfolio (AAAMP) – None

Disclaimer:
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.