Funding Thesis

AT&T (T) doesn’t want presentation. It’s the largest telecom on the planet by income. With over $160 billion in income, a 5%+ yield, and 33 years with consecutive dividend will increase, the massive T is a favourite amongst revenue seekers. Actually, what’s to not love?

Sadly, we are able to say that the inventory efficiency hasn’t impressed anybody prior to now 5 years. Even by together with its juicy payout, T is behind the market by 60%:

Supply: Ycharts

This scenario begins scaring me. The present inventory market is sort of a wave, it brings all the rubbish from the underside to the highest of the ocean. I feel AT&T is browsing a wave it could’t journey. As soon as the wave fades, T shareholders are going to be in a really unhealthy place.

Understanding the Enterprise

AT&T is the world’s largest communication firm by income. It derives most of its income from wi-fi companies. The firm separates its enterprise within the following segments:

Creator’s chart, information from 2016 Annual Report

AT&T’s robust relationship with companies gives constant money move. The Leisure Group is anticipated to proceed rising. After the launch of Direct TV Now, T is finishing the acquisition of Time Warner. The aim right here is to create further synergy between content material (Time Warner) and distribution companies (Direct TV).

Supply: 2016 Annual Report

Revenues

Supply: Ycharts

So as to generate progress, AT&T focuses on the mixing of content material creation talents coming from Time Warner acquisitions to its content material supply companies via Direct TV.

Of their 2016 annual report, administration acknowledged the corporate had constructed a 200Ok+ buyer base for his or her DirectTV Now service. Simply as I feel Disney (DIS) made a smart move in creating their own streaming services, I feel T makes a very good transfer to mix each content material creation and distribution companies. Now it will likely be a matter of how good this integration might be.

The downside I see with T’s technique is that whereas huge acquisitions gas its income progress, money owed are actually on hearth.

Supply: Ycharts

We should always see further income progress as soon as Time Warner is absolutely built-in, however nonetheless, debt nearly doubled prior to now decade. This alone is horrifying.

Earnings

Supply: Ycharts

T’s earnings have gone up and down a number of instances over the previous decade. As the corporate is actively engaged on future progress vectors, I’m prepared to be affected person. Nonetheless, if money move doesn’t enhance at one level, I’m wondering how T will be capable to proceed to pay this juicy dividend and rising debt repayments.

Supply: Ycharts

Free money move hasn’t moved a dime over the previous decade. How will you clarify that? The firm is getting larger and larger, however the money move isn’t. A recognized downside for all telecom is the rising quantity required to construct the strongest community attainable. Annually, each AT&T and Verizon (VZ) need to spend billions in community upkeep and spectrum buy.

Supply: Ycharts

Dividend Progress Perspective

T has efficiently elevated its dividend fee for 33 years making it a part of each the Dividend Aristocrats listing and Dividend Achievers listing. The Dividend Achievers Index refers to all public corporations which have efficiently elevated their dividend funds for no less than ten consecutive years. On the time of writing this text, there have been 265 corporations that achieved this milestone. You will get the complete list of Dividend Achievers with comprehensive metrics here.

Supply: Ycharts

At first look, T’s dividend profile appears excellent. I’d even write that it appears thrilling, don’t you suppose? 5%+ yield with constant enhance 12 months after 12 months feels like a winner amongst many traders. Nonetheless, once you have a look at the dividend progress charge, issues aren’t going effectively. Over the previous decade, T’s annualized dividend progress charge stands at Three.28%. Over the previous 5 years, the annualized progress charge goes right down to 2.18%. This 12 months, the dividend enhance was $zero.01/share or 2.08%. You may count on one other $zero.01 enhance in 2018. This will deliver the expansion charge at 2.04%. AT&T appears like a man who’s operating a marathon for the primary time and gave it the whole lot he may in the course of the first 33 kilometers; he’s critically slowing down and I’m undecided he’ll attain the 42nd Ok.

Supply: Ycharts

When you have a look at the corporate’s payout and money payout ratio, you perceive administration’s cautious strategy. Whereas I recognize administration just isn’t going overboard with tremendous robust dividend enhance, with payout ratios between 75% and 90%, progress may be very restricted.

Contemplating T’s excessive debt and community upkeep bills necessities, T’s future dividend progress isn’t that secure. T doesn’t meet my 7 dividend growth investing principles.

Potential Downsides

Sadly for T shareholders, I see many darkish clouds over their heads. The first one is that AT&T is going through stronger competitors within the wi-fi enterprise. Each T-Cell (TMUS) and Dash (S) are very aggressive of their supply to draw prospects. Each corporations are smaller, however faster to supply what prospects really need; limitless information.

Whereas T expects to retain their shopper by providing content material via Direct TV Now (the place shoppers need to pay for particular bundles to profit from this service), T-Cell is providing Netflix (NFLX) at no cost of their limitless information packages. Do you suppose T can compete in opposition to NFLX in time period of content material? I don’t suppose so.

5G community is arising subsequent. Many traders see it as a progress potential and I can recognize that. However this additionally means further investments to enhance T’s community. Then once more, debt is rising and so are capital expenditures. This is nothing to assist T’s precarious dividend scenario.

Valuation

Whereas I feel that betting on the costly acquisition of Time Warner to seek out progress is a dangerous play, it doesn’t imply that T is that unhealthy. For the upcoming years, the corporate may positively preserve its dividend as is and even proceed its very small dividend enhance. Possibly I ought to have a look at T as I have a look at a 5% yielding bond. However now, is it time to purchase it?

Supply: Ycharts

The inventory value is at present buying and selling at an 18 PE. When I have a look at the previous decade, I can let you know that it appears dear for me. Compared, VZ is buying and selling at 12.70.

Digging deeper, I’ll use the dividend low cost mannequin to find out T’s truthful worth. I’ll faux administration will probably be profitable in integrating Time Warner and can hope for a Three-Four% dividend enhance.

Enter Descriptions for 15-Cell Matrix

INPUTS

Enter Current Annual Dividend Cost:

$1.96

Enter Anticipated Dividend Progress Fee Years 1-10:

Three.00%

Enter Anticipated Terminal Dividend Progress Fee:

Four.00%

Enter Low cost Fee:

9.00%

Low cost Fee (Horizontal)

Margin of Security

eight.00%

9.00%

10.00%

20% Premium

$56.36

$45.23

$37.80

10% Premium

$51.66

$41.46

$34.65

Intrinsic Worth

$46.96

$37.69

$31.50

10% Low cost

$42.27

$33.92

$28.35

20% Low cost

$37.57

$30.15

$25.20

Please learn the Dividend Discount Model limitations to totally perceive my calculations.

In response to the DDM, T is pretty valued proper now.

Last Thought

I cannot argue T is producing lots of money move. I may even not argue that it’s an excellent firm with numerous tasks readily available. Nonetheless, I’m afraid that T is browsing the present bull market and traders are pretending there isn’t a downside. T future success stays within the hand of their tv content material technique.

Competitors within the wi-fi sector will proceed to extend and so are expenditures. This may squeeze T’s money move and dividend progress potential. I slightly goal at decrease yielding corporations with robust progress vectors.

Disclaimer: I don’t maintain T in my DividendStocksRock portfolios.

For those who like my evaluation, click on on FOLLOW on the high of the article close to my identify. That may enable my articles to show in your homepage as they’re printed.

Further disclosure: The opinions and the methods of the creator will not be supposed to ever be a advice to purchase or promote a safety. The technique the creator makes use of has labored for him and it’s so that you can determine if it may gain advantage your monetary future. Please bear in mind to do your individual analysis and know your threat tolerance.

Disclosure: I/we now have no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.