Expert debate: is AT&T a high yield bargain or a dividend trap?
The last few years have not been good for AT&T (NYSE: T). After embarking on a multi-year acquisition spree, the company is grappling with massive debt and steadily shrinking pay-TV business. Its stock price has fallen 28% in the past year, as many investors fear its weak business and bloated balance sheet may end up eating away at the one thing that has held up well: the company’s dividend.
In the October 22 edition of “The Wrap” on Motley Fool Live, host Jason Hall discusses with Motley Fool contributors Danny Vena and Lou Whiteman on AT&T’s prospects. Is AT&T a high yield bargain or a dividend trap? Watch the video to find out where these three experts stand.
Jason Hall: AT&T also just announced their results, AT&T, the ticker is T. Danny, do you mind skipping and putting tickers in the chat. I would appreciate that while I was rambling. AT&T just reported earnings, stocks have climbed after earnings. Here is the thing. Profits fell 25% to $ 0.39 per share, still about 600,000 pay-TV customers. Much of it was DirecTV. But added four and a half million subscribers to HBO Max, it’s their standalone HBO streaming service. Here’s the thing, the 7.4% dividend yield, recent prices on the quarterly payout of 52 cents per share that was just declared. Danny, I’m going to ask you to go here first. Is AT&T a high yield bargain or is it a
Danny Vena: Dividend trap.
Jason Hall: You didn’t even let me finish!
Danny Vena: Trap.
Jason Hall: Tell us why.
Danny Vena: It is not sustainable. AT&T is in a strange position in the industry. They have historically lost telephone subscribers. They lose their subscribers. It is not sustainable for them. They thought their savior was going to be HBO Max. Yes, they catch new HBO Max subscribers, but that won’t save them from all the other subscribers they lose. They just won’t be able to generate the profitability, the revenue, as long as they keep losing subscribers. They cannot therefore maintain this dividend at this rate for a long sustained period of time. Dividend trap.
Jason Hall: Hot lightning goes there. What do you say, Lou Whiteman?
Lou Whiteman: What he said. I am okay. My question on AT&T is first to view it as a potential investment, what part of this business is not just ripe for commodification? What part of this business are you really passionate about from a growth perspective? I do not see it. It’s a collection of assets that we know of, and that’s about the best thing I can say about it.
Jason Hall: I’m going to take the counter approach for both of you and say this is an absolute high yielding bargain right now, and I’ll tell you why. Yes. He paid way too much for DirecTV. It was a stupid expense for a terrible business that was in decline even before they actually bought it. But HBO Max this move to streaming is really smart because it will start to decouple some of their best assets from cable. They added half a million people to their postpaid self-service customers. This part of the business is growing. As much as 5G is going to be zero sum in many ways, due to the size of their network, the depth of their network, and the vast expanse of their network, 5G may unlock some business-to-business opportunities. for things like machine-to-machine communications, remote connectivity that could help offset a lot of other parts of the business.
Danny Vena: I’m sorry, go ahead.
Jason Hall: I’ll let you in here in a second Danny. Plus, a big part of the reason their business struggled was because Hollywood was essentially shut down. The cinemas are practically closed. In the future, a lot of it will get cleaned up and it will help their bottom line. Here is the big one. This is where I will close. Yes, they earn 39 cents per share and their dividend is 52 cents per share. You say, how the heck is that viable when you pay 30% more in dividends and actually earn? Because they have very large non-cash expenses that are not reflected in these GAAP results on a cash basis. It’s consistent and it’s a reliable measure. They generate roughly double the cash flow they need to sustain this dividend. I think it’s quite bearable and I think if it’s someone looking for a sustainable and reliable dividend, it’s absolutely worth buying. Danny, counterpoint before continuing.
Danny Vena: My counterpoint was what, I would really like to see AT&T do, is split into two companies like IBM does. Old World assets versus New World assets and then we’re talking about something.
Jason Hall: Spin it or sell it. I am okay. I 100% agree with that. Get this heirloom business buried in the graveyard. Pass.
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.