Could AT&T Stock Survive A Market Crash?

AT&T (T 1.88%) has long been known as a conservative income stock which has survived previous market downturns while consistently boosting its dividend. Yet big market crashes can cause even the most experienced investors to lose sight of the fundamentals and sell in a panic. Therefore, as the market hovers near historic highs, let's take a moment to see how well AT&T can hold up if the market crashes.

How AT&T fared during the financial crisis
First and foremost, we should study AT&T's performance during the financial meltdown of 2008-2009.

Source: Ycharts.

AT&T's revenue and net income rose substantially through 2008-2010 thanks to its exclusive hold on Apple's (AAPL 1.27%) iPhone, which lasted from 2007 to 2011. But the expiration of that deal in early 2011 -- along with big charges for pension plan adjustments, a $3 billion breakup fee from a failed attempt to buy T-Mobile USA, and a writedown on its phone-directory business -- caused its annual EPS to plunge 81% between 2010 and 2011.

AT&T eventually recovered by diversifying its smartphone lineup with Android devices, raising data prices, and leasing/selling 9,700 cell towers to Crown Castle (CCI -0.03%) for $4.85 billion in 2013. But despite that fundamental recovery, AT&T's stock price still hasn't reclaimed its pre-meltdown high of $42 per share in Dec. 2007.

Fundamental weaknesses
AT&T's main industry rival is Verizon (VZ -0.53%). Both companies each control 34% of the U.S. wireless carrier market in a duopoly, according to Chetan Sharma Consulting. Over the past year, AT&T has slashed prices and raised data caps to compete against Verizon. Unfortunately, that strategy hasn't worked out as well as AT&T planned:

Source: Quarterly reports.

AT&T's price cuts didn't accomplish anything except reduce revenue and raise data expenses per user. That's why AT&T's revenue only rose 2.5% year-over-year in the third quarter, while its diluted EPS fell 19%. To make matters worse, a recent FTC complaint alleges that AT&T misled "millions" of smartphone customers by billing customers with "unlimited" data plans while throttling their speeds by as much as 90%, which could be a boon to Verizon.

Earlier this year, AT&T agreed to buy DirecTV (DTV.DL), the second largest paid TV provider in the country, for $48.5 billion. This would expand its U-Verse (its broadband Internet, phone, and TV bundle) to include satellite TV. With 26 million combined pay TV subscribers, AT&T could also gain more leverage in negotiations with content providers.

Together, the two companies have a combined trailing 12-month free cash flow of $14.2 billion and combined long-term debt of $94 billion. AT&T paid $9.7 billion in dividends to shareholders over the past year -- currently enough to be covered by its trailing FCF -- but if it realizes that the acquisition and integration of DirecTV is more costly than expected during a market downturn, could AT&T reduce its dividend?

How crash-proof is AT&T's dividend?
AT&T has raised its dividends through thick and thin for 28 consecutive years, so I doubt that it will reduce its dividend to free up cash flow. Notice that when things got rough in 2011 and 2012, AT&T preferred to boost its payout ratio past 100% rather than slash its dividend:

Source: NASDAQ.

Therefore, AT&T's dividend is probably the last thing investors should worry about, and its hefty forward annual yield of 5.3% remains one of the stock's most appealing qualities.

The takeaway
In the event of a market crash, investors should remember that they own AT&T for its dividend and not its price appreciation. If its stock price declines while its dividend remains the same, it could rope in new investors with a higher yield, which will help the stock eventually bounce back. Therefore, I believe that AT&T stock will easily survive a market crash, and a market downturn could actually be a buying, rather than selling, opportunity for long-term income investors.