Maybe This Wasn't AT&T's Year -- but It Can Still Pay a Nice Dividend

The new year didn't start out auspiciously for AT&T (NYSE: T  ) , as whispers made the rounds that its exclusive hold on the U.S. iPhone market would be coming to an end. Those rumors came true on Jan. 11, when Verizon (NYSE: VZ  ) announced that it would give its subscribers the choice of buying an iPhone starting in February.

That news affected AT&T's stock price at the beginning of the year …

AT&T Stock Chart

AT&T Stock Chart by YCharts

... but it rebounded when the company made its audacious proposal in March to buy Deutsche Telekom's T-Mobile USA unit for $39 billion. If completed as proposed, that merger would have given AT&T a 26% size advantage over Verizon, making it the largest U.S. carrier in terms of subscribers. Take that, Big Red!

Here's how the biggest U.S. wireless carriers look:

Company

Mobile Subscribers

P/E

Operating Margin

Dividend Yield

Free Cash Flow Payout Ratio

AT&T 101.7 million 14.7 16.2% 6% 66.9%
Verizon 107.7 million 15.6 22.4% 5.2% 44.1%
Sprint Nextel (NYSE: S  ) 47 million N/A 1.6% N/A N/A
T-Mobile 34 million N/A N/A N/A N/A
Industry   22.8 14.3% N/A N/A

Source: Yahoo! Finance. Payout ratio calculated from financial statements for the trailing 12 months. Subscriber numbers from third-quarter financial statements. T-Mobile subscriber numbers from AT&T statement.

Hindsight is 20-20
It now seems inevitable that there would be significant opposition to the merger, but it took several months before that happened. Sprint Nextel, the No. 3 wireless carrier, would be the most significantly affected by the proposal, and it, of course, began lobbying hard trying to stop it. But it wasn't until the chairman of the Senate's Antitrust Subcommittee, Sen. Herb Kohl (D-Wis.), expressed his strong opposition to the merger in letters to the Department of Justice and the Federal Communications Commission, that it didn't seem like a done deal.

Then, at the end of August, the Department of Justice sued AT&T to stop the merger, saying it would violate U.S. antitrust laws. AT&T vowed to fight on, sending an army of lobbyists through the halls of Congress and peppering readers of the major newspapers with full-page adds touting -- among other things -- the job-producing affect that the deal would have on the economy. There was more than just the merger at stake, we learned around that time. AT&T had agreed to a merger-cancellation penalty with Deutsche Telekom worth between $3 billion and $7 billion.

Looking at the stock chart, you can see the affect this growing opposition produced.

But AT&T's lobbying effort had little effect. Just before Thanksgiving, FCC Chairman Julius Genachowski proposed an administrative hearing to determine whether the merger would be in the public interest. This spooked AT&T into withdrawing its merger application from the FCC. The company thought it better to fight just one battle at a time and decided to concentrate on its court match with the DOJ.

The FCC doesn't buy any of it
But then the FCC did something that essentially destroyed AT&T's credibility. The agency released a preliminary report totally rebutting the company's claims that the deal would have a myriad of benefits for consumers and the economy. AT&T lashed back at the FCC, calling the report "so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece." And AT&T CEO Randall Stephenson called out Congress for not keeping a tight rein on the regulatory agencies. "Our Congress has been very lazy in terms of how it has legislated the role of our regulators," he said.

The company vowed to fight on. When asked whether AT&T had a Plan B in case of failing in its fight, the company's CFO, John Stephens, said its Plan B was "Our Plan A." But AT&T couldn't help feeling its grasp slipping and announced that it would be taking a charge for the fourth quarter of $4 billion toward the possible payment of any merger penalty. Trying to put a smiley face on that charge, CFO Stephens wanted to assure stockholders that "the $4 billion charge is a pre-tax charge. ... I certainly expect that it'll be fully deductible."

The Wall Street Journal recently reported that the company's attempts to settle the DOJ's suit by selling off some of T-Mobile's wireless spectrum and other resources to second-tier carriers MetroPCS (NYSE: PCS  ) and Leap (Nasdaq: LEAP  ) , as well as DISH Network (Nasdaq: DISH  ) , have come to a halt. And that may have caused AT&T to finally realize that its merger plans just won't work out -- at least as originally proposed. The company has agreed with the DOJ in requesting a trial postponement and told the judge presiding over the case that it and T-Mobile need to "evaluate all options."

It's finally over
And early Monday evening, AT&T announced that the long national wireless nightmare deal was finally off the table. But in its statement, AT&T left this piece of coal in the Christmas stocking: "The AT&T and T-Mobile USA combination would have offered an interim solution to [a national wireless spectrum] shortage. In the absence of such steps, customers will be harmed and needed investment will be stifled."

Well, at least they're not bitter about it.

AT&T and Verizon are well thought of for their dividend payments. If you're looking for more ideas about great dividend stocks, The Motley Fool is offering a free report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." For those tired of the volatility of the markets, investing in strong dividend paying stocks is the way to smooth out the highs and lows. Check it out for free for more great investing ideas.

Fool contributor Dan Radovsky owns shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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