Name: Should You Buy AT&T for Its 7% Dividend Yield? | The Motley Fool
Brand: fool.com
SKU: fool-com-6
Availability: OnlineOnly

critic

Should You Buy AT&T for Its 7% Dividend Yield? | The Motley Fool

preview

By-Apr 23, 2020 at 12:40PMYou’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more.Market Cap$124BToday's Change(-1.64%)&nbsp;-$0.28Current&nbsp;Price$17.09Price as of September 13, 2022, 12:08 p.m. ETAT&amp;T recently posted weak first-quarter numbers, and pulled its forward guidance in light of the COVID-19 pandemic. The telecom and&nbsp;media giant's revenue fell 5% annually to $42.8 billion, missing estimates by $1.4 billion.Its earnings dipped 2% to $0.84 per share, also missing expectations by a penny. Excluding the impact of , which reduced its earnings by about $600 million, its EPS would have risen 3% to $0.89.On their own, those numbers look dismal. However, many investors might be eyeing its forward yield of nearly 7%, which the company remains committed to paying. Should investors buy AT&amp;T for that beefy dividend, or are its weak spots too soft to ignore?Prior to the pandemic, AT&amp;T faced two major headwinds: the sluggish growth of its wireless subscriber base and its ongoing loss of pay TV subscribers at DirecTV and U-verse. Its $85 billion takeover of Time Warner, which was closed in&nbsp;mid-2018, was aimed at diversifying its business beyond those segments and bolstering its streaming media capabilities.However, AT&amp;T's streaming plans, which include AT&amp;T TV, AT&amp;T TV Now (formerly DirecTV Now), WatchTV, HBO Now, HBO Max, and DC Universe, have been&nbsp;. AT&amp;T spent billions of dollars to secure hit shows like Friends and , but it's unclear if those investments will pull viewers away from Netflix, Disney+, and other established streaming services.Meanwhile, the pandemic forced Time Warner, now known as WarnerMedia, to delay major movie releases like&nbsp;Wonder Woman 1984 and The Batman. AT&amp;T had counted on that box office revenue to boost its free cash flow in 2020 as it expanded its loss-leading streaming business.Those headwinds forced AT&amp;T to rely more heavily on the mobility unit of its communications segment. The mobility division actually performed well during the first quarter, with 163,000 postpaid additions and a postpaid churn rate of just 0.86%, which lifted the unit's service revenue by 2.5% and its operating profit by 9%.Unfortunately, that growth couldn't offset the weakness of WarnerMedia, which posted a 12% annual drop in revenue with a 26% decline in operating profits. The weakness of its pay TV, legacy wireline, domestic wireless equipment, and Vrio (the Latin American branch of DirecTV) businesses exacerbated that pain.AT&amp;T has hiked its dividend annually for 35 straight years. That streak makes it a Dividend Aristocrat of the S&amp;P 500 -- a member of the index that has raised its payout for at least 25 straight years. Dividend Aristocrats are considered top investments for income investors, so AT&amp;T won't cut its dividend unless it faces severe liquidity issues, which shouldn't occur anytime soon.In the first quarter, AT&amp;T spent $3.7 billion of its $3.9 billion in free cash flow on its dividends, which gives it a cash dividend payout ratio of 95%. That ratio might seem high, but AT&amp;T believes it will decline throughout the rest of 2020.During the , CEO Randall Stephenson estimated AT&amp;T's cash dividend payout ratio for 2020 would remain in the low 60s, compared to just over 50% in 2019. Stephenson also declared AT&amp;T remained "committed" to its dividend, and reminded investors that AT&amp;T had weathered "a lot of other crises before." AT&amp;T already in late March, which should free up more of its FCF for dividend payments and the gradual reduction of its long-term debt.In short, AT&amp;T's dividend remains safe, and its 7% yield is significantly higher than Verizon's 4.3% yield. However, Verizon is also more resistant to COVID-19, since it doesn't own a massive, pandemic-impacted media subsidiary like WarnerMedia.AT&amp;T trades at just nine times forward earnings. That valuation could rise as analysts cut their forecasts, but its high yield should also set a floor under the stock. Therefore, AT&amp;T remains a fairly safe income investment for conservative investors.However, investors shouldn't expect AT&amp;T's stock to rally anytime soon, since it will keep losing pay TV subscribers as the pandemic sidelines its new media businesses. But if AT&amp;T finally gets its act together, those new growth engines could finally convince investors to pay a premium for this dusty old dividend stock.*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.Market-beating stocks from our award-winning analyst team.Stock Advisor Returns374%&nbsp;S&amp;P 500 Returns121%Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/13/2022.Discounted offers are only available to new members. Stock Advisor list price is $199 per year.Cumulative Growth of a $10,000 Investment in Stock AdvisorCalculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.Current

By-Apr 23, 2020 at 12:40PMYou’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more.Market Cap$124BToday's Change(-1.64%)&nbsp;-$0.28Current&nbsp;Price$17.09Price as of September 13, 2022, 12:08 p.m. ETAT&amp;T recently posted weak first-quarter numbers, and pulled its forward guidance in light of the COVID-19 pandemic. The telecom and&nbsp;media giant's revenue fell 5% annually to $42.8 billion,...

Should You Buy AT&T for Its 7% Dividend Yield? | The Motley Fool

No article scores yet.

CRITIC REVIEWS

PUBLIC REVIEWS