Could AT&T reduce its dividend?
AT&T (NYSE: T) is a very popular stock among retirees and income investors. As one of the country’s three largest mobile operators, the company has traditionally enjoyed a large, profitable and recurring revenue base from “sticky” phone plans. Many therefore consider it a safe haven.
However, over the past decade, the wireless market has become saturated. In response, former CEO Randall Stephenson made several significant acquisitions in the media space, with the $ 49 billion acquisition of DIRECTV in 2015, followed by the $ 85.4 billion acquisition of Time Warner in 2018. .
That growth looks questionable these days, as challenges in both AT & T’s core wireless business as well as debt-fueled acquisitions could jeopardize the company’s 7.25% dividend. So, could this retiree favorite possibly reduce his payout?
Analyst downgrades AT&T
Recently, KeyBanc analyst Brandon Nispel downgraded AT & T’s rating to an underweight, meaning investors should reduce their holdings. Nispel also gave the company a target price of $ 25, below the current share price of around $ 29. Nispel believes current macroeconomic pressures will push the cord even harder, hitting DIRECTV over satellite particularly hard, while AT & T’s attempt to deliver AT&T TV and AT&T Now streaming (OTT) bundles will not suffice. compensate for these losses.
Even beyond the well-known pay-TV issues, Nispel believes AT & T’s core wireless business is also called into question, with consumers switching to cheaper wireless plans due to financial pressure.
These short-term headwinds are unlikely on their own to result in lower dividends, but each reflects longer-term issues that affect each of AT & T’s business lines.
Long-term problems at DIRECTV
AT & T’s longer term problems run much deeper than these short term hazards. First, buying DIRECTV looks like a big mistake. The expensive purchase almost perfectly coincided with a pay-TV peak in 2014. Since then, the number of pay-TV households in the United States has fallen from 100.5 million to around 83 million today, with a drop predicted to be 72.7 million by 2023. don’t get their internet through the same provider. While AT&T was able to expand its fiber-optic broadband connections in the last quarter, these numbers are well below its video footprint and well below other broadband leaders.
In fact, AT&T would have toured the DIRECTV company. However, apparently the biggest bid for the unit was only around $ 15.75 billion, according to the New York Post. That’s a far cry from the $ 49 billion the company paid five years ago. Incredibly, AT&T continues to move forward with the auction, showing how desperately they want to get rid of the unit.
HBO Max is in a crowded field
Meanwhile, buying Time Warner also seems questionable, with its various cable networks feeling the pinch of cord cuts, and HBO is potentially losing some of its differentiation from other premium OTT networks.
At $ 14.99 per month, the new all-inclusive HBO Max is the most expensive streaming video-on-demand service, and it’s unclear whether it will be able to grow much in an increasingly competitive environment.
With both traditional media conglomerates and large tech companies rolling out their own premium video packages, one of the fears of media investors is that cash-strapped consumers could subscribe to a service for as long as possible. a month, watch specific shows, then cancel to try another service. next month.
This is not an issue exclusive to HBO Max, but it could still affect the number of subscribers in the medium term. While HBO said traditional HBO and HBO Max combined subscriptions were up 5% for the first half of 2020, that’s not all that impressive, as the world was in quarantine for much of the first half of the year and consumers have benefited from stimulus payments.
Now, without a stimulus package coming up and the potential for a vaccine in the months to come, how much HBO will be able to grow is an open question.
The great threat of 5G
However, the biggest threat to AT&T is potentially increased competition in the heart of AT & T’s wireless business. While AT&T has long touted its network as one of the two best in 4G, the recent merger between T Mobile (NASDAQ: TMUS) and Sprint has the potential to make wireless even more competitive as the industry shifts to 5G.
In fact, the “new” T-Mobile has just overtaken AT&T as the nation’s second-largest wireless service provider. T-Mobile aims to beat AT&T and Verizon towards a superior 5G network while offering its traditional lower prices. In other words, the transition to 5G could be a disruptive threat to what investors saw as a safe and uninteresting core business for AT&T.
In the last quarter, all of AT&T’s business lines fell, including the core mobility segment. The very large number of postpaid telephone subscribers fell 0.7%. Even though connected devices and prepaid customers grew, allowing the company to say it had gained mobility subscribers overall, overall mobility services revenue fell 1.1%.
You can’t buy and forget AT&T
AT&T could still make a difference. After all, the idea behind the DIRECTV and Time Warner acquisitions was to be able to bundle together mobility, internet and content offerings. The company may still be able to do this successfully, but it will have to innovate.
AT&T plans to invest an additional $ 4 billion in HBO Max over the next three years, with a goal of reaching 50 to 55 million subscriptions by 2025. If that happens, it could be good news for the WarnerMedia division and help offset the losses of DIRECTV. .
Meanwhile, it’s unclear whether AT&T will lose in 5G. T-Mobile currently has the widest 5G coverage and Verizon has the highest speeds, with AT&T somewhere in between. The company just announced that it had reached nationwide 5G availability earlier this summer, and another wireless spectrum auction is slated for December. It is still early in the race for 5G, so nothing is settled yet.
But be realistic
AT & T’s net profit did not match its dividend in the first half of the year, which is concerning. While free cash flow easily covered the dividend, AT&T has spent less on capital expenditures than its depreciation charges over the past two years. This could mean that it is not spending enough on some things that could improve its competitive position amid all these threats.
AT&T is not a “safe” dividend stock. It is beset by very powerful competitors like Netflix (NASDAQ: NFLX) in media and T-Mobile in wireless, and its high dividend and leverage are burdens these competitors don’t have.
I own AT&T stocks, but it’s a tiny position in my portfolio and part of a basket of what I consider high-risk, high-yield dividend-paying stocks. I am also thinking of selling it completely.
Retirees with a significant position in AT&T under the presumption that it is a safe investment should probably consider diversifying their portfolios away from telecom giant. At the very least, investors should watch the company closely to see if its new 5G and streaming offerings are successful enough to offset the decline in its historic business. If they don’t, a dividend cut a few years is still possible.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.