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Income  | January 17, 2019

AT&T (T) shares have declined substantially over the past two years. A fair amount of this decline is related to the extended acquisition of the Time Warner, as well as concerns over cable and especially satellite subscriber losses, among other matters. The company recently raised its dividend and is now paying a devilishly high dividend of around 6.66 percent. Also, AT&T is expected to launch a Time Warner branded streaming video service in 2019. AT&T’s sizable payout and content were both out of favor last year, but premium content and yield are likely to be more desirable in the next year.

The New AT&T is Performing Well

AT&T last reported consolidated revenues for the third quarter of 2018 of $45.7 billion versus $39.7 billion the prior year. Operating income was $7.3 billion, up 25.2% primarily due to the Time Warner acquisition. Net income attributable to AT&T was $4.7 billion, or $0.65 per diluted share, versus $3.0 billion, or $0.49, a year earlier. Cash from operating activities was $12.3 billion, and capital expenditures were $5.9 billion. Free cash flow for the quarter was $6.5 billion.

AT&T was one of the biggest distributors of communications services for decades, which expanded into media distribution and then content ownership and creation. With the acquisition of Time Warner, AT&T hopes to now deliver its own content as a media service on top of its communications services. This also helped the company diversify its revenue streams.

(Source: November 2018 AT&T Analyst Day)

This was a transformative move that looked questionable at the time, but Disney (DIS) subsequently acquired Twenty-First Century Fox. Moreover, both Disney and AT&T intend to restrict their content from Netflix (NFLX) and other non-proprietary services. This locks up a sizable portion of premium video content and should support content valuations.

Merger Synergies will be Meaningful

AT&T anticipates around $2.5 billion in synergies related to the Time Warner merger that are to be realized between 2019 and 2021, with about $700 million in 2019.

The majority of these synergies are cost related, though some are based upon presumed churn reduction and benefits of cross-selling. Corporate overhead indicates some layoffs will occur at during the next three years.

One serious benefit the company will receive is the ability to advertise on its own platforms. If the company optimizes this, it can always fill in unsold commercial gaps with its own content, or substitute it out when a bonafide purchaser wants the space.

AT&T has a Huge Dividend

Last month, AT&T announced it was increasing the company’s quarterly dividend to $0.51 per share, a 2% increase. The dividend is now providing a devilishly high yield of 6.66%, or about three times the broader market.

(Source: Finviz)

AT&T has a long history of predictable dividend increases, where most already presume it will be increased by a penny in December of this year too. Nonetheless, AT&T’s annual dividend obligation is approaching $15 billion, and there is an expectation that it will increase every year.

AT&T’s strong free cash flow makes it reasonably easy for the company to cover the dividend. According to the company, it should have about $26 billion in free cash flow within 2019.

If interest rates were to increase significantly, it could be the case that AT&T could find it difficult to refinance and continue to make content at the scale Time Warner has while still maintaining that dividend trajectory.

Interest rates were steadily increasing during much of late 2018, but they have weakened with general expectations that the Federal reserve is less likely to continue increasing rates and also concerns over emerging market weakness. Lower rates should be supportive of AT&T’s ability to pay out that dividend and also make the dividend more attractive to investors.


AT&T appears ready to perform well continues to earn strong free cash flow, while paying a significant and growing dividend. AT&T appears cheap below or around $30. AT&T announced it will report earnings on January 30, 2019.

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