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AT&T’s Dividend Path

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Aug. 16 2017, Published 9:33 a.m. ET

AT&T: Technology sector, domestic telecom services industry

AT&T (T) has managed to record growth in its 2016 revenues, mainly driven by its Entertainment Group and International segments. DirecTV followed, with IP (Internet Protocol) broadband and fixed strategic service revenues contributing to growth in service revenues for 2016, partially offset by a fall in wireless revenue and equipment revenue. AT&T’s operating income fell 2.0%, driven by costs of the DirecTV acquisition. Higher interest costs associated with the acquisition further affected EPS (earnings per share), leading to a substantial fall in 2016. The company has maintained a solid free cash flow position, which has covered its dividend obligations. It has also decreased its share repurchases since 2014, which is an artificial way of enhancing the company’s EPS. Its financial leverage and debt-to-equity ratio have seen a rising trend over the years.

AT&T’s wireless customers and video connections have grown over the years. In-region network access lines have fallen substantially over the years, followed by broadband connections.

We can see from the graph below how the dividend yield has always breached the 4.0% mark. (Note that the asterisk in the graph denotes an approximation in calculating the dividend.)

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Revenue in the first half of the year

AT&T’s revenue for the first half of 2017 fell 2.0% due to all the segments declining, except International. The decline was due to a technological shift from legacy products and declining wireless equipment revenues, partly offset by growth in wireless services and fixed strategic services revenue. Operating income recorded growth, driven by lower operating expenses. Finally, EPS rose despite rising interest costs. AT&T continued to generate enough free cash flow to cover its dividend obligations.

We can see in the above graph that AT&T beat the S&P 500 in 2015 and 2016. (Note that the asterisk in the graph denotes the price gain or loss to date.)

AT&T stock has fallen 11.4% on a YTD (year-to-date) basis amid price wars with Verizon (VZ) and smaller players such as T-Mobile US (TMUS) and Sprint (S). Increasing demand for Internet-based broadband and video services will be partially offset by pricing pressure. Contributions from DirecTV and wireless properties in Mexico are expected to fuel growth, partially offset by integration costs. The Time Warner acquisition will lead to an additional debt burden, thus pressuring the company’s margins.

AT&T’s PE (price-to-earnings) multiple of 18.1x compares to a sector average of 39.7x. Its dividend yield of 5.1% compares to a sector average of 4.7%.

The iShares Select Dividend (DVY) offers a dividend yield of 3.1% at a PE ratio of 20.3x. It has the highest exposure to utilities. The Vanguard Dividend Appreciation ETF (VIG) has an annual dividend yield of 2.1% at a PE ratio of 23.5x. It has the highest exposure to industrials.

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