AT&T (T) stands apart from its rivals due to its impressive dividend history. AT&T has increased its dividend for 35 consecutive years, showing the ability to grow in a wide range of economic environments (including recessions), observes dividend expert Ben Reynolds, editor of Sure Retirement.
In addition to a long history of dividend growth, AT&T also has an exceptionally high dividend yield that has been north of 6.5% recently. This yield is historically high for AT&T.
The company’s average dividend yield in 2009 – the worst year of the Great Recession when stock prices collapsed — was 6.4%. AT&T is trading at bargain prices today, despite its long history of success and stable cash flows.
The reason for AT&T’s low stock price and corresponding high yield is concerns over the company’s large acquisitions of both DirecTV and Time Warner. These acquisitions have leveraged AT&T’s balance sheet. The company’s debt-to-EBITDA ratio will be around 2.8x at the end of fiscal 2018.
Management is prioritizing debt reductions. The company expects to reduce its debt-to-EBITDA ratio down to 2.5x by the end of fiscal 2019.
AT&T expects tremendous free cash flows (operating income less capital expenditures) of $26 billion in fiscal 2019 against an interest expense of approximately $8.5 billion and dividends in the range of $14 to $15 billion. This leaves billions in additional cash flows to pay down debt.
While the market is penalizing AT&T for debt incurred from its recent acquisitions, it has failed to recognize the increased cash flow and growth potential of AT&T resulting from the same acquisitions.
Synergies from the TimeWarner acquisition are expected to reach $2.5 billion annually by 2021, with $1.5 billion of that being cost reductions. The TimeWarner acquisition significantly boosts AT&T’s content creation ability.
The company is well positioned to grow earnings-per-share and dividends for years to come. Pessimism and resulting low share prices and high yields make now an opportune time to invest in AT&T for the long run.