If you have been a regular follower of my work then you know I keep 20%-25% of my portfolio in high yield, which I define as anything over 4%. What a year 2016 was for my top dividend growth holding, AT&T (NYSE:T). Today I saw that the company is set to report earnings next week and I wanted to preview what I am looking for and discuss expectations. Mind you, I remain bullish on this name. It has and always will be an income machine, but 2016 turned this name into a growth play as well. So not only did this name provide a solid stream of income, it delivered over 25% growth in share value. While the name has pulled back about 10% off its highs, with the unprecedented innovation coming out of the company I have maintained that this name is going higher. It has been simply mindblowing. That said, in order for the stock to move, it must deliver. It comes down to performance, and I am eagerly awaiting this set of results for various reasons.
The company has had a history of essentially meeting expectations. Some quarters it beats, some quarters it misses, but the name usually comes in right around expectations with few surprises. Suffice it to say analysts have a good read on the company. Analysts are looking for a consensus of $0.66 earnings per share. I am looking for revenues of $42.25 billion, slightly ahead of the consensus $42.1 billion. The earnings figure will depend on both the ability of the company to of course hit sales but also manage expenses. The company does have a history of so-so quarters, rarely blowing the numbers away but also seldom missing estimates terribly, so I think these numbers will be met. But with a growing wireless network bringing in new customers with its strong LTE signal and a 4G LTE network, a DirecTV mobile push, massive funding going into 5G technology, just announced investments into its own facilities, as well as continuous infrastructure building, the expenses game is one that is tough to predict. A look to last year's comparable quarter may offer some insight.
I can tell you that in company's reported fourth quarter for 2015, AT&T delivered performance that caught me by surprise. Revenues actually missed estimates by $650 million. Past performance is not necessarily a predictor of what we will see this year. What is notable that these revenues continue to grow. The company is of course growing revenues from all sources as it slowly is becoming a top media and entertainment company worldwide. But the expenses. That is what is key. Operating expenses were $34.6 billion last year. For reference in the Q3 2016 quarter, expenses were $34.5 billion. I am looking for exactly the same expenses this quarter. Should my revenue figures also pan out, we should see margin expansion and growth in operating income versus last year.
I will be watching closely cash flows, both operational cash and free cash flow after capital expenditures. On top of this I will be on the lookout for customer additions in the quarter for each of the company's key services, with special emphasis on examining DirecTV and its mobile results. Those are key. As the dividend has been raised like it always has, I will be looking closely at the payout ratio. The company has aimed previously for a 70% payout ratio for the dividend, so this is something to keep an eye on. When it comes to the conference call, hopefully we can get more clarity on the pending deal with Time Warner (NYSE:TWX). That deal will be a game changer, but of course, whether it happens is still up in the air.
Regardless of what happens with Time Warner, this is a name that has turned the ship around. I just can't ask for much more. 2016 was a stellar year and I am eagerly awaiting guidance for 2017 along with this release. Now, whether the quarter is a blowout, a miss, or as I suspect, pretty much in line, I'm in this for the long term, planning to hold the name for 30 years. Collecting/reinvesting dividends, trading around the core position, and adding the holdings whenever the yield gets noticeably higher. Right now the dividend is up another penny from last year. I am looking for the same raise again at the end of this year as the debt gets paid down. AT&T is a serial dividend raiser which is now offering growth. The question that will be answered next week is whether the innovation is driving customers to the brand and in turn, if this is driving financials higher.
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Disclosure: I am/we are long T.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.