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Income  | February 27, 2019

AT&T Inc.'s (T) stock has fallen 15% over the past year, and the outlook for the shares looks dire now. The company reported poor fourth quarter results that showed subscriber declines in its DirecTV and DirecTV Now units. Meanwhile, revenue in its newly acquired Time Warner division is struggling.

The stock's dividend yield of 6.5% screams of trouble ahead for a company with $175 billion in total debt, and a very high dividend payout ratio of 70%. Couple all of this with a company that is expected to see earnings grow a meager 3.6% through the year 2021, a compounded annual growth rate of 1.2%, and it creates a scenario for a stock that's likely to go nowhere at best, with the potential to fall even further.c

Subscriber Losses and Revenue Growth

Together AT&T's DirecTV and DirecTV Now units lost 670,000 subscribers in the fourth quarter alone, a 3.2% decline. Meanwhile, revenue fell for HBO to $1.673 billion from $1.680 billion, while Turner's Warner Bros' dropped from $3.230 billion to $3.212 billion. If not for the Warner Bros' movie unit's strong holiday season, the results could have been disastrous for the newly acquired Warner Media unit.

The Dividend Yield Screams Danger

The real trouble lies in what the stock's dividend yield of 6.55% is telling investors. The spread between AT&T and Verizon Communications Inc.'s (VZ) dividend yield is 2.26%, its widest since 1987. Meanwhile, the spread between the U.S. 10-Year Treasury and AT&T is at 3.83%, its widest since 1987 as well. The wide spreads that Verizon and the 10-year Treasury have with AT&T's yield would suggest that there is a real risk associated with AT&T's very high dividend yield.

All Goodwill and Intangible Assets

AT&T has total assets of $531 billion and of that 58%, or $310 billion is in the form of goodwill and intangible assets; this is a slight contrast to Verizon, which has a ratio of just 48%. That is AT&T's highest goodwill and intangible assets to total assets ratio in the past 10-years. Again, another illustration of how indebted this company has become in recent years since making the big acquisition, which to this point is not fueling growth.

No Growth

Analysts currently see revenue rising 7.7% in 2019 to $184.2 billion, and then flatlining through the year 2021 at roughly $185 billion for each year. Additionally, earnings are forecast to rise by only 2% at $3.59 in 2019, and to $3.65 in 2020 and 2021; meager growth.

Fairly Valued at Best

The stock trades at roughly 6.6 times its enterprise value to EBITDA on a trailing twelve-month basis. However, that is in line with the broader telecom's sectors 6.4, according to data from YCharts. It makes it hard to argue that AT&T is currently a bargain at its current valuation, and with the massive debt and risk associated with the dividend, one may consider that the stock should trade at a discount to the group.

How Should an Investor Protect Themselves?

It may be wise to protect oneself from a further drop in AT&T's stock. Our proprietary model suggests that the stock is now elevated and at risk for a further decline should it fall below $28.30 using our conservative model. Over the past three years, when the stock fell below our trigger price, it dropped on average by almost 6%. The model has currently been flashing at an elevated risk since October 11, 2018, and the stock has dropped 16.1% during this time. Over the past 3-year period, the stock has entered this risk zone 10 times. Our conservative model price point runs a smart adjusting trailing stop and can be used for better profit protection, whether proactively or with immediate risk alerting. Right now, our model suggests the risk is high for a further decline in the stock.

Even with the dividend payments over the past 5-years, the stock has been a disaster, falling 18.3% from its highs in early 2017. It makes holding a stock solely because of the dividend not always worth it. In AT&T's case, holding the stock for only the dividend may turn out to be a big gamble that to this point has not paid off.

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