AT&T’s superior yield
The recent dividend represents an increase of 2% compared to its dividend in the fourth quarter of 2018. The company has increased its quarterly dividend for 35 consecutive years. Its long dividend payment history indicates stability and reliability.
AT&T’s annualized dividend will be $2.04 per share, which suggests a dividend yield of 5.5%. Peer Verizon yields 4.1% at the moment. In the last five years, AT&T has increased its dividend by 2% compounded annually. Its current yield represents a premium of a notable 380–400 basis points to the ten-year Treasury yield and the S&P 500 (SPY).
AT&T’s annualized dividend implies a payout ratio of close to 60% in 2019, much higher than the average of the S&P 500. The payout ratio shows how much of the company’s profits are distributed to shareholders in terms of dividends. AT&T’s average payout ratio for the last three years comes to around 63%.
Free cash flow
AT&T’s long dividend payment history indeed looks attractive. However, investors wonder whether it will continue in the long term. AT&T has stable earnings and large free cash flow to take care of its dividends. Free cash flow is the leftover cash from operations after capex. It’s generally used for dividend payments, debt repayments, and expansion.
AT&T is expected to give away $15.0 billion in dividends in 2019. Importantly, during the first half of this year, the company generated $14.7 billion in free cash flow. It increased its free cash flow guidance to $28.0 billion in the current year.
Now let’s talk about AT&T’s debt. At the end of the second quarter of 2019, it held net debt of a mammoth $162.0 billion. It’s expected to shell out around $8.0 billion in debt servicing this year. AT&T will release its third-quarter earnings results on October 23.
Elliott Management, the activist shareholder that recently disclosed its stake in AT&T, has also insisted AT&T pay back its debt aggressively. Elliott blamed this debt on the company’s recent acquisitions, including DIRECTV and WarnerMedia. The activist investor is turning up the heat on AT&T’s management, according to Fox Business Network on September 23. Elliott is demanding a say in the company’s management and wants to help choose a successor for CEO Randall Stephenson.
AT&T stock rallied after Elliott disclosed its stake on September 9. The activist shareholder expects huge value to be unlocked in AT&T after strategic changes and sees the stock at $60.0 by the end of 2021. AT&T stock peaked to a 52-week high soon after that. It’s up more than 30% so far this year.
T-Mobile (TMUS) stock has surged more than 25% so far this year. T-Mobile doesn’t pay dividends. Even after a year and a half, the long-awaited T-Mobile and Sprint merger is still pending due to multiple challenges. To learn more, read T-Mobile–Sprint Merger Is Now More Uncertain.
Elliott called AT&T stock “deeply undervalued” in a letter to the board of directors early this month. The stock is currently trading at 10.4 times its estimated earnings, almost half the S&P 500’s value. It’s also trading at a large discount to its historical average.