Cloud Ambitions Could Threaten The Dividend Yield For AT&T Stock

  • AT&T has committed its corporate future to the cloud.
  • Cloud sucks capital at $1 billion/year and does not yield quick profits.
  • With mobile phone competitors also pressing, AT&T's current 5.25% dividend yield is now under threat.

The history of AT&T (NYSE:T) is one of a comfortable, stodgy, monopoly carrier. A generation ago AT&T was the “phone company”. After the 1984 consent decree split AT&T into 7 regional Bells, Southwestern Bell and BellSouth moved quickly into mobile telephony, eventually buying the old long distance and Internet operation to take back the AT&T name.

Even in this guise, AT&T has lived in a comfortable duopoly with Verizon (NYSE:VZ), which is the former Bell Atlantic and NYNEX combined. Between them, they control most of the cellular data and phone traffic in the U.S., and both have become steady yield plays. At current prices, AT&T offers a yield of 5.24%, and it manages to clear its dividend rate with net income easily.

But this may be about to change. AT&T has seen the future, and it’s a very competitive future, in the cloud. The company is demanding that all employees improve their technology skills or look for the exits.

While other companies, like Hewlett Packard Enterprises (NYSE:HPE) and Verizon, have closed their public cloud operations, under pressure from Amazon (NASDAQ:AMZN), AT&T is announcing new features, adopting open source, and turning its old central offices into cloud data centers.

AT&T is going even deeper into cloud, alongside Digital Realty (NYSE:DLR), a competitor of Equinix (NASDAQ:EQIX), expanding its footprint with colocation services.

Cloud, unfortunately, is not an easy space to compete in. Amazon and its primary competitors put $1 billion/quarter into cloud data centers, and margins for most competitors are wafer-thin. AT&T has enough capital to make the commitment, but it doesn’t have the margin with shareholders to forego profits along the way, as Amazon did for years.

Meanwhile, T-Mobile US (NASDAQ:TMUS) and Sprint (NYSE:S) are both investing heavily in their own mobile phone networks, and dropping prices, nibbling at AT&T’s market share and cutting into the Average Revenue Per User, or ARPU, that defines profits in this space. AT&T is milking its cash cow for all its worth, but that cow is slowly drying out.

Personally, I like the AT&T strategy. It supports the Internet core assets SBC acquired when it became AT&T. It serves the mid-sized business customers that the phone company was born to serve. Cloud is far more than infrastructure, it’s also the underlying structure for providing software and all the data services a modern company needs.

But this is not going to be an easy transition for AT&T, nor is it going to come cheap. I would not expect many dividend increases over the next few years, which means that current dividend yield is going to decline, and yield is the reason why you buy a stock like AT&T.

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