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How Safe Is AT&T's Dividend?



In this video, we perform a deep dive into AT&T’s dividend safety.

To begin, let’s talk about AT&T’s business model. AT&T is a leading provider of communications and digital entertainment services in the United States and worldwide. The company provides internet access as well as television and wireless services to millions of consumers. AT&T trades on the New York Stock Exchange with a market capitalization of $233 billion.

AT&T is one of the world’s most popular high yield dividend growth stocks. The company’s current dividend yield is 6.2%. You can download our database of high yield dividend stocks here:

Moreover, AT&T is a consistent dividend grower. In fact, the company has increased its annual dividend payment for 34 consecutive years. This qualifies AT&T to be a member of the Dividend Aristocrats Index, a group of exclusive dividend stocks with 25+ years of consecutive dividend increases. You can download our database of Dividend Aristocrats here:

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Since the beginning of fiscal 2018, AT&T has been guiding for adjusted earnings-per-share of about $3.50 for the twelve-month reporting period. When the company reported second quarter financial results on July 24th, it raised its guidance to the ‘high end’ of this range.

For context, AT&T currently pays a quarterly dividend of $0.50 per share, which is equivalent to an annual payout of $2.00 per share. This implies a dividend payout ratio of 57% if the company is capable of meeting its 2018 guidance for adjusted earnings-per-share.

Using earnings, AT&T’s dividend is very safe, and we have no concerns with its sustainability moving forward.

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Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare AT&T’s current dividend payment to its free cash flow.

AT&T expects to generate free cash flow of approximately $21 billion in fiscal 2018. Importantly, this guidance is inclusive of all costs associated with the Time Warner acquisition.

During the second quarter, AT&T had 6.351 billion weighted average common shares outstanding. If we multiply this by the company’s current annual dividend payment of $2 per share, we determine that AT&T should pay out about $12.7 billion of dividends each year unless its share count changes significantly. Using the free cash flow guidance that the company provided in its last earnings report, this results in a free cash flow dividend payout ratio of 60%.

Using free cash flow, our conclusion for AT&T’s dividend safety is the same as when we used earnings. We see no risk of a dividend cut in the near future.

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AT&T’s debt level is elevated right now due to its recent acquisition of Time Warner. Under the terms of the merger agreement, each share of publicly-traded Time Warner stock was exchanged for $53.75 in cash plus 1.437 shares of AT&T common stock. Total consideration was $79.1 billion. The cash portion of the transaction was funded primarily through debt issuance.

So just how big is AT&T’s current debt burden? The company wrote the following in it’s most recent quarterly filing with the Securities & Exchange Commission:

“We had $180,209 [million] of total notes and debentures outstanding at June 30, 2018, which included Euro, British pound sterling, Swiss franc, Brazilian real, Mexican peso and Canadian dollar denominated debt that totaled approximately $36,146 [million].”

Fortunately, AT&T’s business stability means that the interest rate that it pays on its debt is rather reasonable. The company wrote the following in the same filing:

“Our weighted average interest rate of our entire long-term debt portfolio, including the impact of derivatives, was approximately 4.3% as of June 30, 2018 and 4.4% as of December 31, 2017.”

To determine the safety of AT&T’s dividend in a rising interest rate environment given the company’s tremendous debt load, we can perform a stress test that measures the company’s change in free cash flow for certain changes in its weighted average interest rate. The results of such a stress test are shown here.

As you can see, AT&T’s blended average interest rate would have to rise to 9% – more than twice its current level – for its free cash flow to fail to cover its dividend payments under current business conditions. Key assumptions here include a constant level of debt for the company, the achievement of its 2018 free cash flow guidance, and no meaningful increases to its annual dividend payment. Despite these numerous assumptions, the wide margin of safety here leads us to believe that AT&T’s current dividend payment is very safe indeed.

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