During the recent market collapse, AT&T (T) has seen their dividend yield soar to levels not seen since the financial crisis. The wireless and media giant has plenty of cash flows to survive and continue paying the dividend during a recession. My investment thesis has long been bullish on the stock closer to $30 and more bearish around $40 with the current situation no different.
Image Source: HBO Max website
Back in 2009, the stock dipped to only $21.44. At the time, AT&T only paid a quarterly dividend of $0.41 or the equivalent of $1.64. The annual dividend yield reached 7.6% and is now only slightly lower at 7.3% with the annual dividend payout 27% higher at $2.08.
Source: Seeking Alpha dividend history
The dividend tipped over 7% back during the financial crisis, but the recent low of $26.08 pushed the dividend yield up to 8.0%. As mentioned prior research, the dividend yield appears to hit an equilibrium around a 5.0% dividend yield. Over the last 15 years, the stock regularly trades above and below this target yield which equates to a current stock price of $41.60.
Technically, the higher dividend yield indicates the market foresees higher risk here due to the large debt balance. In reality, the high yield on AT&T has traditionally signaled more an issue with the domestic economy, than anything specific with the wireless giant.
The financial impact of the economic shutdown is unknown at this point. The federal relief plan will inject $2 trillion into the U.S. economy so one can’t make a huge case for corporations or consumers abandoning wireless or internet plans. AT&T definitely faces some issues with the lack of live sports leading to more cord cutting and the delay of movies cutting media sales.
This economic blip highlights the keys of repaying debt and avoiding stock buybacks with a debt load of $151 billion. Thankfully, AT&T repaid over $30 billion of debt since closing the Time Warner merger to avoid more fears in the market.
Source: AT&T Q4’19 presentation
A lot of investors argued for share buybacks due to the capital efficiency of buying stock when the dividend yield was above 5% while interest costs lower. These investors always missed the risk current hitting the market with an economy shutting down. Any debt has to eventually be repaid and the reduction of outstanding debt reduces risk in times of a crisis.
The company already completed a $2 billion share buyback to repurchase 56 million shares in 2019 and spent another $3 billion in January to buy 85 million shares. Luckily, AT&T was able to call off a planned $4 billion share buyback during Q2.
Even a financial hit from the coronavirus of a few billion in free cash flows this year would leave AT&T with $26 billion in free cash flows to pay the large dividend. At the current share count of 7.26 billion, the company has an annual dividend payout of $15.8 billion.
Source: AT&T Q4’19 presentation
AT&T was in such a good cash flow position the company had a plan to spend up to $10 billion on share buybacks this year to retire 250 million shares. The cancellation of the recent $4 billion buyback plan provides extra capital for the wireless giant to build up a cash balance. Hopefully, the company will now choose to further repay debt to eliminate any risk in the future of being caught with a large debt balance while a global economy shuts down.
The key investor takeaway is that AT&T is positioned to survive any current economic downturn with limited problems. The company will have no problems maintaining the dividend similar to the financial crisis over a decade ago.
Once the stock rebounds, the bigger issue is the lack of innovation and action by the company. AT&T still plans to launch HBO Max in May, instead of taking advantage of this opportunity where viewers are stuck at home. The company might literally launch the streaming video service as consumers around the country are free to leave the house and have limited desire to stay home and watch videos.
Below $30 and trading with a dividend yield above 7%, AT&T provides an ideal investment for a rally. The stock isn’t attractive long term due to the slow acting management team in a dynamic market.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.