Can AT&T Keep The Dividend Yield High?

  • AT&T cut its capital budget last year and barely made its dividend through net income.
  • The capital budget is back up, and so are earnings expectations.
  • This may be the best income stock on the market right now.

AT&T (NYSE:T) has been one of the hottest stocks of 2016 because its yield of 4.97% is considered safe by investors.

But is it? Over the last four quarters, the company’s $1.88 in dividends have been covered by just $2.26/share in net income. During the September quarter, AT&T's EPS covered its dividend by just 3 cents/share, but the company went ahead and raised the dividend by a penny.

This is its priority when it goes to shareholders, having enough earnings to cover the dividend. For the first quarter of 2016, which it will report after the market close on April 26, analysts are expecting AT&T to report 69 cents/share in earnings on revenues of $40.88 billion. That would be the biggest dividend cover the stock has enjoyed in some time, and it’s why the stock is up 12% in a market that is barely break-even.

While rival Verizon (NYSE:VZ) has focused on buying Internet content through AOL and is paying off the $130 billion bill it ran up to buy itself (45% stake) from Vodafone (NASDAQ:VOD), AT&T is dealing with integrating its own $48.5 billion purchase of DirecTv into the portfolio.

DirecTv gives AT&T the national footprint it has lacked in its present incarnation, which began as a regional Bell originally called Southwestern Bell, and another one called BellSouth, created by the 1984 break-up of the original AT&T. After leading the industry’s wave of consolidations for three decades the new AT&T can now serve customers with something just about everywhere, whether that’s wired service in the Southeast and Southwest, mobile phone service in most major markets, or DirecTv just about everywhere.

AT&T is now the biggest mover of bits in America, having acquired a host of wireless companies, including Leap Wireless (known by its brand name Cricket) since moving its headquarters from San Antonio to Dallas in 2007. (The first Southwestern Bell headquarters was in St. Louis.) In addition to its wireline and wireless bit-moving business, it also owns the Internet core business of the original AT&T, which was acquired by the then-SBC in 2005, and that should be a key investor focus in 2016.

The business of moving bits is a continuing race of investment to get ahead of deflation because technology keeps dropping the costs of moving bits and competition assures consumers will gain those benefits. T-Mobile US (NASDAQ:TMUS), which AT&T tried unsuccessfully to buy in 2011, continues to pile on marketing pressure under its CEO, John Legere, while the wireline business continues to degrade under pressure from cable giants like Comcast -A (NASDAQ:CMCSA), whose thicker wires enable faster speeds and DOCSIS architecture allows easier upgrades. AT&T is fighting back in some markets by running fiber and offering “GigaPower” service.

All this costs money, but AT&T reduced its capital spending in 2015 to keep that dividend high.  AT&T’s capital budget is back up for 2016 as it moves into business markets like software defined networking and cloud services.

So long as AT&T can keep making its numbers, and thus meeting its dividend obligations to shareholders, it will remain a great stock for income investors. After some hiccups, partly due to the cost of DirecTv, it seems on its way to doing just that. If you want income buy the AT&T stock.

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  • I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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