- AT&T has very positive growth prospects.
- While the company's $105 billion debt load seems like a lot, it is very manageable considering it is only 2.5x its EBITDA.
- The 5% dividend is safe.
AT&T (NYSE:T) is one of the few blue chip companies with a safe 5% dividend and various positive growth prospects. AT&T's growth prospects are one of the best among blue chip telecom companies. Growth prospects and dividend safety should, in my opinion, be the number one concern for dividend investors. This is because revenue growth largely dictates a company's ability to increase its dividend payments.
Much has been said recently about Verizon (VZ) winning a bidding war against AT&T. In order to avoid reiterating this, I will redirect to this article. Long story short, Verizon's acquisition of Straight Path was a strategic move aimed at creating an advantage in developing a 5G network. Still, it is unclear that this will result in a sustainable competitive advantage for Verizon versus AT&T. In any case, AT&T has many growth opportunities that they are exploring and investors should not be too focused on one acquisition.
Of course, only a small portion of this is organic. The biggest source of growth will come from DirecTV and the acquisition of Time Warner, which I talked about in a previous article. Just because these are acquisitions, doesn't mean that AT&T simply "purchased" revenue without additional strategic rational as I wrote previously:
"The company aims to become a global leader and the premier integrated communications company in the world. With DirecTV, the company was able to have their best ever fourth quarter in terms of churn rate. This company credits this success to their TV Everywhere application, data free TV and DirecTV Now. With TWX the company is acquiring even more high quality networks like HBO (Game of Thrones) and all the Turner Networks."
In other words, AT&T is looking to create a vertically integrated company through these acquisitions.
Another interesting thing is that AT&T is expanding into Mexico since the US wireless market is already saturated. The number of smartphone users in Mexico will be almost twice as much as the current number of smartphone users.
Of course, this requires a lot of upfront investments, which are reflected in - among other things - the acquisitions of Lusacell and Nextel Mexico in 2015. The CFO is expecting these investments to start paying off this year:
"And if you look at the 2016 results, you can see, we made significant investments in Latin America and specifically in Mexico. And we expect those to start to pay off this year."
AT&T has become the fastest growing wireless carrier in Mexico as a result of the significant investments and solid execution. Of course, even though the company expects their investments to start paying off, I would not be too optimistic about the effects on the dividend. I expect margins to stay somewhat suppressed because additional investments are still required in order for the company to capture more market share. AT&T's current market share sits at around 10%, which makes the company the 3rd largest operator. Obviously, there is room for AT&T to grow.
Naturally, growth comes at a price. Companies that aim to grow need to reinvest. The financing for this reinvestment process needs to be able to happen. In that light, some investors might be concerned about AT&T's growing debt load. Especially considering the TWX merger. It helps if we put this debt load in context.
AT&T currently has $105 billion in debt, which sounds like a lot and quite frankly is a lot. But, if we take that number and place it next to the annual EBITDA of $41.3 billion, things don't seem that bad. In other words, AT&T has a debt to EBITDA ratio of 2.5. This is a very manageable number and definitely signals that the company is not overleveraged.
Of course, EBITDA and free cash flow are very different metrics. Free cash flow is also the metric we should be looking at in order to establish whether the company can pay its dividends. In 1Q17, the company generated $3.2 billion in free cash flow while the dividend payments amounted to $3 billion.
Obviously, the free cash flow is enough to cover the dividends. In my previous article, I calculated if AT&T would still be able to pay its dividends post the TWX merger. If you want the full rundown of my calculations, you can visit the previous article. My conclusion was that AT&T can most definitely keep paying its dividend post-merger and it will most likely keep increasing the payment.
AT&T might be an enormous company, but there is still room left for growth. Investors can buy AT&T for its dividend and growth, which is a rare thing to see in a blue chip stock. Especially considering that T pays a very nice 5% dividend.
This article was written by
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