Here's Why the Best Is Yet to Come for AT&T, Inc.

AT&T’s coming acquisition of Time Warner positions this dividend powerhouse to extend its leadership position in the wireless and entertainment industries.

Andrew Tonner
Andrew Tonner
Jun 3, 2017 at 4:33PM
Technology and Telecom

For those unfamiliar with the telecom titan, AT&T (NYSE:T) may not look like the best bet in telecom today.

Case in point, the wireless giant's shares have dramatically underperformed the broader market averages over the past 12 months and year to date in 2017.

T Chart

T data by YCharts.

However, its recent performance obscures two important reasons AT&T remains a compelling buy. Here's why the telecom giant's powerful combination of dividend payments and growth potential makes it my top pick in the telecom sector today.

A dividend stock like few others

Let's start with the past and present before moving on to the future. Working within this construct, AT&T's impressive history as an income investment is particularly noteworthy.

As I have cited in many prior posts, AT&T's potent mix of historical dividend growth and current yield earn it my vote for the best dividend stock in the telecom industry. Here are two important figures you should know that help support this point:

  1. AT&T has increased its dividend for 32 consecutive years, making it the only U.S. dividend aristocrat in the telecom space.
  2. Its shares currently yield an impressive 5%, which stands more than two and a half times higher than the S&P 500's current 1.9% cash payout. 

That said, AT&T stock is not necessarily the embodiment of dividend perfection, either; it has some important risk factors. Namely, the company currently pays out almost all of its net income -- a 95% dividend payout ratio at most recent count -- as dividends.

However, it's important to note that the cash-rich nature of AT&T's business model means its actual cash flows are far larger than its accounting income. Case in point, AT&T's cash flows from operations totaled $40.6 billion versus $12.6 billion in income attributable to common shareholders over the past 12 months, so the metaphorical well from which AT&T can pay its dividends is much deeper than a metric like payout ratio suggests.

Equally important, its paltry dividend growth rate also detracts from AT&T's status as an otherwise great dividend stock. The company has only increased its cash payouts at an average annual rate of just 3.2% each year over the past decade. Of course, some growth is better than none, but this falls well short of some of the top dividend growth stocks on the market today.

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Fortunately, AT&T has one extremely important growth driver in place that should allow the wireless giant to continue its rich tradition of overall dividend excellence for years to come.

A series of telecom towers are silhouetted in the foreground in front of a city scape as the sun rises.

Image source: Getty Images.

Leading the push into wireless cable

Last October, AT&T struck a deal to acquire TV and movie programming giant Time Warner (NYSE:TWX.DL) in an $85.4 billion stock-and-cash deal. The deal stands as just one of AT&T's recent mega-deals -- its $48.5 billion buyout of DirecTV in 2014 also deserves note, here -- but this buyout holds the key to AT&T's vision to bring cable broadcasts directly to mobile devices. Let's walk through the steps involved in this investing thesis since it can seem somewhat unintuitive.

In a sense, the deal is all about leverage. AT&T already owns the requisite spectrum to launch its own wireless cable service in the coming years, especially as 5G networks come online toward the end of the decade.

It also counts 146.8 million wireless customers and 38.7 million TV subscribers to whom it could distribute this type of product. However, AT&T will likely need to secure additional content distribution rights from major content powers like Comcast to broadcast their channels via its over-the-top service.

In theory, large cable producers could simply refuse to license these new terms, essentially blocking AT&T from launching what figures to be a highly compelling offering. However, with Time Warner's cable assets like CNN, TNT, TBS, and more, AT&T can leverage its own content assets to bring other cable companies to the table. At least in this sense, Time Warner's strategic value is akin to a massive insurance policy.

Expect AT&T combine this new wireless cable service with its current cellular, internet, and other product offerings. Since only Comcast should be in a position to match AT&T on this front, it certainly seems plausible that AT&T could use its wireless cable to steal wireless customers away from rivals like Verizon Communications, T-Mobile, Sprint, and more. Seen through this lens, there certainly appears to be ample evidence to remain bullish on AT&T stock in the years to come.