2021 Week 13: AT&T (NYSE:T)

The FiveTwenty portfolio received no dividends in the past week.

Past Week Dividend	$0
Current Quarter Dividend	$84.57
Estimated Annual Dividend	$919.62
LifeTime Dividend	$84.57

The capital allocation for the week of 03/28/2021 to 04/03/2021 will be used to establish a position in AT&T (NYSE: T).

T – Company Profile

AT&T (NYSE: T) is a global telecommunications, media, and technology services company. The company operates through 2 segments: Communications, WarnerMedia, and Latin America. The communications segment offers wireless voice and data services; video services; internet connectivity services; as well as equipment sales and rentals. The segment markets its services and products under the AT&T, Cricket, AT&T TV, DirectTV brands. The WarnerMedia segment produces, distributes and licenses TV programming; features films; and mobile and console games. It also operates cable networks; video streaming platforms (HBO Max); and pay television services HBO and Cinemax. The Latin America segment offers video entertainment under the DirectTV and SKY brands; pay-TV services; wireless services under AT&T and Unefon brands; as well as handset sales. Official Site | Wikipedia

Dividend Streak	36 years
Yield	6.86%
Payout Ratio	65.40%* (GAAP -277.33%)
P/E	9.53* (GAAP NA)

Financials

Does T have the financial means to sustain and raise its dividend going forward?

Over the last decade, T grew its top line revenue. In recent years, T made large acquisitions to offset downward pressure on revenues due to the declines in its wired communication business and commoditization of wireless services. (The company acquired DirectTV in 2015 and Time Warner in 2018). GAAP net earnings during the period have been all over the place. A lot of this volatility is driven by large non-cash expenses related to depreciation of capital, as well as amortization cost and one-time costs related to acquisitions. On the other hand, free-cash-flow grew more consistently over the period.

In the last 10 years, GAAP EPS exhibited the same volatility as GAAP net earnings. However, adjusted for non-cash expenses and one-time items EPS have increased steadily over the period. The only exception to the trend was 2020, which saw a decrease in adjusted EPS due to COVID-19 impacts of $0.43 per share.

The average dividend per share growth rate was 2.10% per year in the past 10 year and 1.80% per year in the past 3 years. (per GuruFocus) The relatively low growth rate has lead to a decrease of the payout ratio as a percentage of adjusted EPS from 78% to 65% over the period. Furthermore, the payout ratio as a percent of free-cash-flow dipped under 60% for FY 2019 and 2020 and is expected to come in the high 50’s% range for 2021.

T in 2020 and 2021

COVID-19 had material impacts on FY 2020 financial results. The WarnerMedia business saw lower revenues due to production delays and movie theater closures. Additionally, T collected significantly lower revenues from international roaming services due to reduced travel. And finally, the company incurred higher expenses to protect front-line employees, contractors and customers.

The year also saw a continuation of previous business trends. The communications segment saw subscriber and revenue growth for wireless phone and broadband internet services, while net subscriber losses and revenue declines continued for video services. The WarnerMedia’s HBO had another strong year topping 41 million US and reaching nearly 61 million global subscribers.

Finally, T reiterated debt reduction and monetization of non-core assets as near term priorities. On 02/26/2021 T announced the spinoff of DirectTV and its other pay-TV US business in a deal with TPG Capital. As part of the deal T will receives $7.8 billion cash and retains 70% ownership of the new company. The transaction improves T’s future growth profile and provides it more capital it can deploy for debt reduction.

Valuation

Are we paying too much for T at current share price?

During the past 10 years the PE ratio (based on GAAP earnings) has seen a low of 5.50 and a high of 50.11, with a median value of 16.69. (per GuruFocus) Currently, the shares trade at a PE ratio 9.53 based on TTM adjusted net earnings.

The current share price of $30.31 is 3.8% above 50-day moving average and 3.9% above 200-day moving average. Additionally, the price is at about the 60th percentile of the 52-week range.

The share price increased 8.6% from its low at the beginning of March 2020. However, it still remains attractive compared to historical values.

Yield

How does the current dividend yield for T compare to historical values?

In the last 10 years, the dividend yield for T has been in a range of 4.39% to 7.7%, with a media of 5.46%. (per GuruFocus) The current TTM yield of 6.86% is materially above the historical media.

The high yield raises concerns with the safety of the dividend. However, the dividend seems to be well covered. Additionally, the current guidance suggests management continues to be committed to pay it.

Thesis

Why are we adding T to the FiveTwenty portfolio?

With a streak of 36 years of increasing the dividend, T has been a solid dividend investment for decades. Its communications segment has been a reliable cash cow during this time that still has some growth left in it. At the current valuation and yield, T is priced like a declining business. However, the underlying business fundamentals tell a different story.

We believe share price is currently disproportionally impacted by the high debt load and the poor performance of the DirectTV acquisition. Furthermore, we believe the company is on the right path to address both those issues.

Additional Research

• AT&T: DirecTV Spinoff Is Fantastic News (T) | Seeking Alpha
• There’s No Reason AT&T Offers Any Upside (NYSE:T) | Seeking Alpha
• Dividend Aristocrats In Focus Part 56: AT&T – Sure Dividend
• AT&T: Haunted By Ghosts Of Recessions Past (NYSE:T) | Seeking Alpha
• AT&T dividend | High yield – Slow growth – Some risk | Dividends Diversify

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Photo by Paweł Czerwiński on Unsplash