Overall, AT&T (T) had a middling 2013. The year was marked by moderate wireless growth, largely offset by serious revenue declines in the legacy wireline assets. AT&T is attempting to reverse this trend, recently selling off its Connecticut based wireline business to Frontier Communications (FTR). However, the company is now facing the results of the decline of wirelines, namely in the form of much weaker FCF in 2014. Short-term, this may result in an elevated dividend payout ratio and a likely reduction to its capital return program. AT&T offers a $0.46 per share quarterly dividend and yields slightly less than 5.50%.
Q4 2013 Overview
On January 28, AT&T reported its Q4 2013 results. For the quarter, AT&T posted revenues of about $33.16B, up 2% from $32.58B last year. Adjusted EPS came in at $0.53, up 20% from $0.44 last year. Both of these metrics came in above average analyst estimates.
(click to enlarge)For the year, AT&T spent $13.0B buying back over 366M shares, reducing its float by 6%. When combined with the dividend, AT&T returned nearly $23B of capital to its shareholders, for a total shareholder return of well above 10%.
However, when digging deeper, the results are a mixed bag. Below is a look at AT&T's result by segment.
AT&T's wireless segment posted overall Q4 revenue growth of 4.5% to $17.6B. By far, the largest driver of wireless revenue growth would be the wireless data, seeing its revenues increase 17% to $5.7B. Wireless equipment sales also saw a small 3% uptick to $2.8B. However, wireless voice and other services revenues saw a 1% decline to $9.9B.
In terms of wireless segment profits, overall earnings came in at $3.9B, up a massive 54% from $2.5B last year. This was due to AT&T significantly lower operating expenses in Q4, down 5.4% to $12.5B. This can be seen it the segment margins, which saw an increase to 21.4% from 14.5% last year.
AT&T's wireline segment continues to be its weak spot. Total segment revenues saw a 1.4% decline to $14.7B in Q4. Leading the decline was obviously wireline voice revenues, down another 11% to $4.8B. Also declining were AT&T's other wireline revenues, which are mostly related to voice, down 4.6% to $1.3B. However, these revenues declines were nearly offset by growth in wireline data, up 5.6% to $8.6B.
Wireline segment profits fell nearly 19% in Q4 to $1.45B. Margins were also impacted, down to 9.9% from 12% last year. This decline was mostly a side effect of the declines seen in the high margin wireline voice segment and higher operating expenses related to AT&T's Project VIP.
Expect lower FCF in 2014
However, the most significant decline AT&T is facing is in its free cash flow, or FCF. For the quarter, FCF came in at $2.46B, down over 47% from $4.60B last year. While last year's FCF did benefit from one-time items, the decline is still very steep. Sequentially, AT&T's FCF declined roughly 24% compared to $3.2B in Q3 2013.
AT&T 2014 outlook calls for FCF to fall to $11B in 2014, down 20% from $13.6B in 2013. This is will lead to much less cash being left over for share buybacks given that AT&T's pays out nearly $9.5B per year in dividends. Also note that dividend payout ratio will exceed 85% this year, which may lead to less room for a possible dividend hike.
AT&T's guidance for 2014 also calls for 2% to 3% revenue growth, largely driven by expected increases in wireless data revenues. The company is also aiming to reduce its cost structure, as seen by the October 2013 $4.9B cell-tower deal with Crown Castle International Corp (CCI). AT&T's Project VIP is also expected to ramp up this year, which will result in higher capex requirements to the tune of $21B.
Overall, it appears as if AT&T had a good quarter. EPS, when adjusted for items, improved sharply while revenues were up modestly.
However, the increased capex requirements in 2014 will greatly impact FCF. As a result, I expect AT&T to slow down its share buyback program this year. The company has noted that it does not want to increase its leverage. Therefore, given that over 85% of cash is being spent on the dividend, there is little left over for the buyback program.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.