AT&T (T) will find out about the after-life in the wake of its decision to leave for dead its bid for Deutsche Telekom’s (DTEGY.PK) T-Mobile unit after strong U.S. government pushback. The question for investors: Is there life in its generous dividend policy?
Despite this strategic setback, AT&T should see revenue and earnings growth this year. According to analysts canvassed by First Call, the telephone giant is expected to see revenue increase from $126 billion in 2011 to $128 billion in 2012, with earnings per share growing to $2.45 from the $2.25 expected to be reported for 2011.
To be sure, analysts’ estimates for the fourth quarter of 2011 have come down significantly in the last 90 days, according to First Call. The current quarter consensus estimate has decreased from $0.58 to $0.45, down 22.3%, a steeper decline in expectations than the average integrated telecom services industry move of -7.0% during the same time period.
AT&T pays out 89% of its net income (using trailing 12 months’ numbers) to shareholders, compared with 80% for Verizon (VZ) and 45% for Vodaphone (VOD). AT&T’s current dividend of $0.44 per quarter yields 5.8% based on the recent stock price, compared with 5.00% for Verizon ($0.50 per quarter current dividend) and 3.4% for Vodaphone ($0.49 semi-annual dividend). Deutsche Telekom paid an annual dividend of $0.96 last year for a yield of 8.4%. Sprint Nextel (S) pays no dividends.
Based on recent income and balance sheet statements, AT&T would appear to be secure in its dividend policy. Profitability has been in the top tier of its industry group, according to Standard & Poor’s, with a gross margin of 57.2% vs. the industry’s 50.4% and an operating margin of 16.2% vs. the industry’s 15.3% in the trailing 12 months.
In the quarter ended Sept. 30, 2011, cash flow from operating activities was $10.393 billion and dividends paid totaled $2.545 billion, providing ample coverage.
AT&T, though disappointed in its failed bid for T-Mobile, was unrepentant for trying.
John Stankey, chief executive of AT&T’s business solutions unit, was quoted in the Financial Times as saying, “We don’t have any second thoughts about that.” Failure of the deal “is going to be unfortunate for the industry and consumers in the longer term,” he said.
FT reported: “Mr. Stankey added that AT&T executives still believed the purchase made sense and said it would have enabled the group’s wireless business to obtain the spectrum it needed to improve service to its customers faster that other methods it is now pursuing.”
It seems obvious that AT&T miscalculated the depth of government opposition to the deal, but it is seeking growth opportunities elsewhere. Looking to shrug off its failure, AT&T, the second-largest wireless provider after Verizon, recently announced it was expanding its 4G LTE, or long-term evolution, network to 11 new markets, including New York and Los Angeles.
Late last month, AT&T announced that it had completed its $1.9 billion acquisition of spectrum from Qualcomm (QCOM). AT&T purchased 700 MHz spectrum licenses covering more than 300 million people for approximately $1.9 billion.
These initiatives and expectations on the profitability front should keep AT&T on a growth path steady enough to pay the dividends investors have come to expect. The company announced last month it was increasing its quarterly dividend to $0.44 from $0.43, marking the 28th consecutive year of dividend increases and a signal that, despite the T-Mobile disappointment, AT&T should be a solid performer for income-oriented investors.