AT&T (NYSE:T) is the focus of this third article in this series on high-yielding equities. If you are a dividends seeker, you need to tip your hat to this reincarnated company for its payout consistency and growth. Check out AT&T's dividends payout history around the financial crisis, and compare it to some of the companies that are not in my trading set such as GE -- which has yet to recover its pre Financial Crisis payout level -- and it is easy for you to realize why T is on the list and GE is not.
AT&T has very little to do with its century plus old namesake. In reality, AT&T is a mother under the full custody and management of its most powerful daughter. You see, "Ma Bell," the old AT&T, was the successor to the old Bell company that the great Alexander Graham Bell founded. Due to the anti-trust breakup in 1983, the then largest company on Earth was broken into "baby Bells," with AT&T becoming mainly an interstate and long distance provider. Having fallen on hard times in the early 2000s, the company was acquired by SBC, its most ferocious daughter. SBC then took over its Ma's name and that is what we have at this point.
AT&T at the time of writing is around $176 billion in market cap. It pays $0.46 quarterly dividends, making its annualized yield at around 5.5%. Given my view on dividends stated in my earlier article, an investment in AT&T falls under the "buy for the dividends" category, as it is clearly yielding higher than the 30-year bond -- currently at 3.7%. Hence my primary focus as an investor would be to assure capital preservation and dividends payout stability.
The old AT&T is a pure example of why management should be the primary focus of any investor. You see, whether it is the 1983 breakup or the 2003 demise -- that led to its eventual acquisition by SBC in 2005 -- it is clear that both outcomes were the result of unusually bad judgment by the management of this prior company.
The current chief executive and chairman is a child of the SBC parent company. He is handsomely compensated -- reminiscent of Annaly (NYSE:NLY) and not Altria (NYSE:MO). Note that many other executives are also from SBC. That is not a bad thing, considering that SBC -- in my opinion -- was the most successful of the baby Bells. Governance level is high, but the "club" aura of the common SBC ancestry is something for the investor to watch out for.
As mentioned before, dividends payout was consistent, and periodically increased, as demonstrated in the above link. Hence, in my opinion, AT&T exceeds the requirement of payout stability that is necessary for such high-yielding equity to be considered investment grade.
To investigate capital preservation concerns, we will need to -- as usual -- visit the earnings releases as listed with the SEC. As such, let us examine the latest available quarterly report, that of Q3-2013.
As an aside, when I look at utility and phone company statements, I am normally hypersensitive to "special items" and "special charges." As a -- losing -- ex-investor in the old AT&T, I have to admit that on many occasions then, as a PhD in engineering and applied maths, I could not understand the earnings reports. I just could not then make out whether the company was truly making or losing money. The reports were usually loaded with "one-time items" that polluted the space. This lesson learned and something that I encourage other investors to apply: If I cannot understand the statement, I do not need to be vested in the company.
To this end, an item that shows on page 4 and needs attention is depreciation. You see, the company's property, plants, and equipment assets of more than $282 billion have about 60% depreciation attached to them. In essence, we are past half-life of all such asset category.
The company -- also on page 4 -- lists around $75 billion in goodwill and intangible assets out of $275 billion of total assets. This is high, but not overly so as we saw in MO, and considering the many brands that the company has, it may be on the reasonable size considering the total asset base. Further, the $68 billion in debt is reasonable considering the tangible asset base. Hence, considering this line of business, I do not view T as highly leveraged. To cap this discussion, note that the reduction in stockholder equity as listed on that statement can be easily attributed to increase in treasury stocks (buyback). As such, this important part of the statement is comforting.
A look at cash flows suggests that things improved from a year ago, and no special issues are raised by these listings. As such, moving to breakup of cash flows (page 11) you will unfortunately find that the company does not provide prior 3-month or last year 3-month comparisons. Hence, you really need to do that yourself -- for instance the Q2-2013 quarterly report can be found here -- or you may opt to have someone else to do "a summary" homework for you, something I do not really recommend for serious investors.
At the end of this exercise, I cannot unveil any peculiarities that warrant any serious concern. Hence, from a financial point of view AT&T seems to continue to be an investment grade company with tidy finances.
Telecoms are notoriously sensitive to a multitude of factors, and as we saw with "Ma Bell" earlier, the very existence of such behemoths is always challenged. As such, no capital preservation discussion is complete without one on company prospects.
The first aspect of T is that it is a consumer services company. Hence, overall macroeconomic views affect it, and significantly so. Further, it is a technology infrastructure company. Hence, technological advances are a dual edged sword. On one hand, such advances afford the company something new to offer. Be it the iPhone in 2007, expanded data services on your mobile, Fiber to the Home (FTH), or any of the many exciting technologies, these are good selling points for the company to offer consumers.
Yet, such technological advances can cause infrastructure to either be utilized faster than planned, or create a need to renew, well before depreciation schedule. As you saw from examining the quarterly statement, T is capital investment heavy, and the more they spend in infrastructure, the less you get in either dividends or share buy-back.
Additionally, with technology, you will never know when the next disrupting technology will appear and what its impact will be. For example, look at "WhatsApp" and how it affected your SMS behavior, and "Viber" and how it affected your phone calling behavior. In essence, phone companies lucked out in the sense that these and similar technologies are users of data. That is, the loss of revenue was not complete. Further, most companies offer flat packages where, if anything, this shift to data is helping them de-emphasize one aspect on the voice side of the network and expand on the data side -- and charge more for it.
So the question is: what disruptive technology down the line will affect revenue without offering replacement? This is why you need to keep an eye on current technology. As such, serious investors allocating their hard earned money in the market need to do a serious homework. Hence checking sources, such as these publicly available McKinsey reports, to attempt to gauge the fortunes of the sector as a whole and those of their chosen investment, is exceedingly important.
Further, the fortunes of the government are important. You see, governments worldwide, USA included, view telecoms as cash cows. Just pull out one of your old -- a decade or two ago -- phone statements and compare the taxes, regulatory fees and the like. You will be shocked to say the least! These do not even include fees that the company is paying directly, such as bandwidth purchases and the like.
The growth of the industry seems to be shaped by success in capturing, servicing and integrating the evolving trends in digital communications, mobility and infrastructure. For instance, even if you are not the Chief Technology Officer of a telecom, a serious investor may need to examine this Mckinsey report directed towards such CTOs.
Overall, AT&T rates well on this front, and I cannot see a disruptive new comer in the field. Yet, as I repeated above, this is a volatile industry to invest in, and hence you need to continually be on the watch to assure that "preservation of capital" continues for this particular company.
This takes us down to attempting to time an entry point. Here, we resort to technical analysis and charting.
The 10-year monthly chart below is indicative of my view that such high-yield companies need to be viewed more for the income stream and less for capital appreciation.
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On the above chart, the company hardly did a 50% appreciation over the charted 10-year history. Further, all the gains garnered due to the iPhone agreement prior to the Financial Crisis, were paid back to the piper during the crisis -- look at the 2006-2009 time frame in above chart.
Hence, little if any capital appreciation can be expected from this company.
Similar to other charts we examined in previous articles in this series, we find that around mid to late 2012 there was a stabilization, or even drop, in stock price. This can be easily attributed to the changing interest rate environment and the return of the "risk appetite." This is something all high-yield companies will always suffer from. The below 3-year weekly chart spells out this effect even further.
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In addition to interest rate sensitivity, the above chart reveals the uncharacteristically volatile nature of the telecom business. You see, the last few months have seen events, directly or indirectly impacting T, relating to Sprint (NYSE:S), Verizon (NYSE:VZ), Vodafone (NASDAQ:VOD), and the T-Mobile (NYSE:TMUS) courtship-turn-into-rivalry.
Again, as much as these events do cause fluctuation in stock price, hence creating repeated opportunities to invest, in reality, AT&T should be viewed as a long-term investment with yield and dividends payout as the primary concern. To this end, attention should be paid to long term (10- and 30-year) bond rates in order to time incremental entries into this market. In this uncertain and rising interest rate environment, I feel that this is the right approach.
Further, using events to increase investment -- through averaging on the way up and not attempting to handle falling knives -- may be a good strategy for investing in AT&T since the stock price shows more frequent and higher event-driven sensitivities than companies of similar size and stature.