AT&T Inc (NYSE:T) 5.5% dividend yield stands out for dividend investors. Dividends have long been a central part of AT&T’s shareholder return. AT&T (NYSE:T) is a Dividend Aristocrat thanks to its 31 consecutive years of dividend increases.
In the investing world size and stability often (but not always) go together. AT&T is the second largest telecommunications company in the United States. AT&T has a market cap of $179 billion versus $189 billion for rival Verizon Communications Inc (NYSE:VZ).
AT&T operates in two segments: wireless and wireline. The wireless segment now accounts for 56% of the company’s revenue. The wireline segment generated 44% of AT&T’s revenue in its most recent quarter.
The wireless segment is made up of the company’s smart phone, cell phone, and tablet data contracts.
The wireline segment sells internet, television, and voice over IP services to individuals. In addition, the segment provides VPN, cloud, hosting, IP conferencing, and Ethernet services to business customers.
The United States Telecommunications Oligopoly
The United States wireless telecommunications market is dominated by 4 companies. AT&T, Verizon, Sprint, and T-Mobile have greater than 90% market share. AT&T and Verizon each have over 30% market share.
Competition is reduced when an industry is dominated by only a few large businesses. Lower competition is not good for consumers, but great for the few dominant businesses. AT&T and Verizon in particular are large enough to reap the lion’s share of profits in the telecommunications industry.
Why is the wireless industry in the United States dominated by only a few large players?
Due to the high barriers to entry into the market. There are massive up-front costs to building the infrastructure necessary to be in the United States telecommunications industry.
In addition, wireless spectrum usage is controlled and auctioned by the United States government. AT&T spent $18.2 billion in the last spectrum auction. In total, the auction raised a cool $44.9 billion for the FCC.
Spectrum auctions prevent smaller players from gaining access to the wireless industry. The government plays a large part in this industry. It should not surprise anyone that AT&T has spent over $184 million on lobbying since 1998. It would be shocking if the company were spending this money and not getting any return on investment.
Returning Profits to Shareholders
While the unique economics of the wireless telecommunications industry may be bad for consumers, they are good for investors.
AT&T currently has a payout ratio of 72% of expected 2015 earnings. The company returns the bulk of its profits to shareholders. Investing in AT&T (or Verizon) entitles you to the bulk of the profits generated in an oligopolistic industry.
In addition to AT&T’s sizeable dividend payments, the company also returns money to shareholders through share repurchases. AT&T reduced its share count by 2.2% a year from 2007 through 2014.
AT&T’s Acquisition Fueled Growth
AT&T’s future growth will come from its pending acquisition of DirecTV (DTV) and its planned acquisition of Nextel Mexico.
The DIRECTV (NASDAQ:DTV) acquisition will result in meaningful synergies between the two companies. The company is expecting annual savings of $2.5 billion a year within 3 years of the acquisition. The deal is expected to close this year.
The strategic rationale for the DirecTV acquisition is as follows: DirecTV will give AT&T a quality video partner. Streaming is expected to become increasingly important on mobile devices in the future. DirecTV will play a large part in streaming in the future.
In addition, DirecTV has a strong presence in Latin America. AT&T is focused on expanding internationally into Latin America. The DirecTV acquisition is a way for the company to quickly gain access to this market.
AT&T’s Latin American expansion begins with Mexico. The company is acquiring Nextel Mexico. AT&T recently announced it would invest $3 billion to extend its high-speed mobile internet to 100 million Mexican consumers by 2018. Customers on AT&T Mexico plans will be able to make calls on their Mexican plan while in the United States to others on AT&T plans. This ‘2 countries, 1 plan’ approach should have wide appeal in Mexico and help AT&T gain market share in the country.
Safety and Recession Performance
AT&T’s telecommunications business generates stable cash flows. The company locks its customers into multi-year contracts that typically have steep cancellation fees.
AT&T has customer churn of around just 1% a month. This means customers do not often switch from AT&T to rival competitors. Both cancellation fees and the similarity of competitor offers to AT&T help to discourage cancellations.
AT&T’s stable cash flows and long history of consecutive dividend increases make it very likely the company will continue to pay increasing dividends.
The company performs well during recessions. AT&T saw earnings-per-share dip slightly during the Great Recession of 2007 to 2009, but the effects were not severe; the company remained highly profitable. AT&T’s earnings-per-share through each year of the Great Recession are shown below:
- 2007 earnings-per-share of $2.76
- 2008 earnings-per-share of $2.16
- 2009 earnings-per-share of $2.12
AT&T’s Valuation and Final Thoughts
What price-to-earnings ratio would you expect to pay for a shareholder friendly company that is recession resistant and has international growth potential? Probably more than a forward price-to-earnings ratio of 13.2, yet that’s what AT&T shares trade for at this time.
AT&T currently ranks in the top 25% of stocks with 25+ years of dividend payments without a reduction using The 8 Rules of Dividend Investing. AT&T offers investors a combination of stable cash flows and an exceptionally high dividend yield at a compelling valuation.