AT&T Dividend: Slowing Or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AT&T (NYSE: T) shareholders love the company's dividend. In fact, I would argue that over the last few years, the primary reason many investors bought AT&T was the dividend. I'll lay it on the line right up front. I'm worried for your dividend. Let me show you what I've found, and you tell me if these numbers worry you.
First, let's get this out of the way. I worked for AT&T years ago during college. I loved the company, I thought the customer service was top notch (I was a customer service rep. after all) and I owe a lot to AT&T for helping me through college, with a job I could work at night and on weekends. I don't hate AT&T. However, the numbers are what they are. AT&T has about 103 million wireless subscribers, and at last count, Verizon (NYSE: VZ) has about 108 million subscribers. That being said, as I noted in my prior post about Verizon's dividend, over the last year or so, Verizon has added nearly three times as many contract subscribers as AT&T. Now part of the reason for this I'm sure is, there were customers who had the Apple (NASDAQ: AAPL) iPhone on AT&T because they wanted the device. They didn't care what network they had to use, they wanted the iPhone (count me as one of these). As these contracts are expiring, they are switching to their preferred network. This effect will likely diminish over time, as both companies will have offered the iPhone and these defections decrease. That being said, AT&T has other issues bigger than iPhone defectors.
I don't mean the issue of subsidizing smartphones. That issue is overblown and you can read here, the reasons behind why I think wireless carriers will continue to heavily subsidize smartphones. Despite what you may have heard, it's profitable to the carriers. With AT&T and Verizon in particular, customers have to sign up for a data plan of at least $25 a month to get a smartphone. While these carriers don't love it when customers upgrade their phone every two years, they don't lose money on any of these customers. Don't believe that for a second.
There are two real problems that AT&T does have: their dividend growth is slowing down, and their free cash flow payout of the dividend is going up. In fact, in the last three years, look at what the free cash flow payout ratio has done:
You can see this is going to be a problem. With the ratio jumping from 54% to nearly 70% in the last three years, AT&T is on a track for an unsustainable dividend. When you consider that Verizon also has seen an increase in its payout ratio, you might think that both companies are in the same boat. However, Verizon's payout ratio has increased to just 55%, which is where AT&T was 3 years ago. With AT&T at a higher payout ratio and showing flat cash flow in the last three years, it might not just be cell phone customers switching from AT&T to Verizon, it could be investors as well.
Speaking of the dividend, here is what AT&T (after all the big mergers) has done in the last five years:
Five years ago, the dividend was increased by 12.6%, after that, the average increase has been a $0.04 per year increase. As the dividend amount gets bigger, this $0.04 becomes a smaller percentage. This percentage of increase has dropped from 2.5% in 2009 to 2.33% in 2012.
While AT&T's current yield of 5.36% looks good on paper, Verizon's yield of 4.96% isn't far behind. Verizon has averaged a 3.69% increase in the dividend in the last few years. AT&T shows an increase of 2.41%. The fact that Verizon shows the higher expected future growth rate at over 11% versus AT&T's expected growth rate of 9% is another factor to consider.
Long story short, I'm worried for AT&T shareholders. Many people have held AT&T stock for a long time, and assume that the company will be able to increase the dividend forever. As these numbers show, AT&T isn't in trouble yet with the dividend, but that day might be closer than shareholders realize. The dividend is definitely slowing down. If AT&T can't find a way to ramp up free cash flow generation, it might not be a question of whether the dividend will be raised, but a question of how long can the company maintain the current dividend. With Verizon's stock showing almost the same yield, and better potential earnings growth, I think investors need to start thinking long and hard about why they own AT&T stock.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.