- AT&T has a $183 billion market cap and a 5.2% dividend yield.
- The first quarter of 2014 showed free cash flow of $3 billion, dividends of $2.4 billion and $1.2 billion of share repurchases.
- The company continues to see an increasing number of postpaid subscribers select smartphones rather than feature phones.
After looking at the AT&T (NYSE:T) pension plan earlier in the week, there was some criticism that I did not analyze other pieces of the business. My intention with this article is to look at the safety of the dividend and the first-quarter operations.
How Safe Is The Dividend?
First-quarter 2014 cash flow summary ($ in billions)
Cash from operations
Free cash flow
Cash from asset sales
Net debt / Adjusted EBITDA
The first quarter saw more than 1.1 million postpaid smartphones added in the quarter. 81% of smartphones are on usage plans according to AT&T, and these are the most profitable customers. This compares to 75% of smartphones on usage plans in Q4 2013.
The net additional subscriber summary follows (in thousands of plans)
Total net adds
The above chart shows improved trends in every category. Smartphones and tablets drove 625,000 postpaid net additional subscribers, while business applications drove the connected devices growth.
As the wireless industry continues to mature, AT&T has launched a wide variety of service plans, including Mobile Share and AT&T Next (a program that allows for the purchase of devices on installment), and expect to launch additional plans during the second half of 2014.
The company continues to see an increasing number of postpaid subscribers select smartphones rather than feature phones, which lack general Internet access. As is common in the industry, most of AT&T subscribers' phones are designed to work only with AT&T wireless technology, requiring subscribers who desire to move to a new carrier with a different technology to purchase a new device. Postpaid subscribers also continued to add more tablets, reflecting the popularity of the Mobile Share plan.
Nearly 80% of postpaid smartphone subscribers use a 4G-capable device (i.e., a device that would operate on our HSPA+ or LTE network), and more than 50% of our postpaid smartphone subscribers use an LTE device. Due to substantial increases in the demand for wireless service in the United States, AT&T is facing significant spectrum and capacity constraints on its wireless network in certain markets.
The company recently updated the 2014 outlook, and is expecting consolidated revenue growth of 4% or greater. The company expects capital expenditures in the $21 billion range, and free cash flow of about $11 billion. The free cash flow figure is thanks to strong "AT&T Next" sales and Leap cost syngergies.
In July 2013, AT&T announced an agreement to acquire Leap Wireless, a provider of prepaid wireless service under the Cricket brand name, for $1.2 billion plus a non-transferable contingent value right (CVR) per share.
AT&T acquired wireless properties, including spectrum licenses, network assets, retail stores and approximately 4.6 million subscribers. Leap's spectrum licenses include Personal Communications Services (PCS) and AWS bands and are largely complementary to the AT&T licenses. Leap's network covers approximately 96 million people in 35 states and consists of a 3G CDMA network and an LTE network covering approximately 21 million people.
The Leap transaction closed in the first quarter of 2014. $1.2 billion of integration costs are expected over two years. The acquisition allowed for an aggressive move into the prepaid space, and there is significant value for tax purposes tied to a net operating loss. Also, there is interest expense savings due to debt refinancing opportunities.
If AT&T can handle the acquisition of DirecTV as wisely and proficiently as the Leap transaction, I would expect strong profitability going into 2015.
I conclude that the AT&T dividend is safe for 2014 and into 2015, primarily due to continued additional subscriber wins. AT&T trades at a large discount to the S&P 500. The trailing P/E ratio is about 10x compared to an S&P 500 index trading at almost 18x. Also, note that AT&T has an above market dividend yield of 5% compared to an S&P 500 dividend yield of 1.7%. Regardless of the risk around the pension plan, I rate this stock a Buy.
AT&T is also in the process of acquiring DirecTV (DTV), according to recent news reports and press releases by the company. The above article is an opinion, and not investment counsel.