Shares of AT&T (NYSE:T) plunged 8% to a new 52-week low on Oct. 24 after the telco posted a mixed third quarter earnings report. The company's revenue, boosted by its acquisition of Time Warner (now known as WarnerMedia), rose 15% annually to $45.7 billion and beat estimates by $320 million.
Its adjusted earnings rose 22% to $0.90 per share, but missed expectations by four cents. The bottom line miss was disappointing, especially since WarnerMedia added $0.05 to AT&T's earnings during the quarter.
But after that big drop, many investors are probably wondering if it's safe to buy AT&T for its forward yield of 6.6%. Let's take a closer look at AT&T's dividend and the telco's biggest headwinds to find out.
A classic Dividend Aristocrat
AT&T is a Dividend Aristocrat, a member of the S&P 500 that has hiked its dividend annually for over 25 years. AT&T (known as Southwestern Bell/SBC Corporation before 2005) raised its dividend annually for 33 straight years.
AT&T expects its adjusted EPS to hit the "upper end of the $3.50 range" this year, which would represent at least 15% growth from the previous year. The company currently pays a $0.50 quarterly dividend, which equals $2.00 per share for the full year -- which should be easily covered by its earnings.
AT&T noted that its free cash flow (FCF) rose 17% annually to $6.5 billion during the quarter, and it expects to finish the year with FCF "at the high end of the $21 billion range." That should give AT&T, which spent $12 billion on dividend payments in fiscal 2017, plenty of room to raise its dividend and pay off its long-term debt.
Why did AT&T's stock tumble?
Over the past few years, AT&T struggled with the sluggish growth of its wireless business, declines at its wireline business, and a loss of pay TV users. The company is trying to offset those declines with the acquisitions of DirecTV and Time Warner, but the turnaround -- which relies heavily on bundling strategies -- has been slow.
AT&T gained 550,000 phone net adds in the US during the quarter, which consisted of 69,000 postpaid net adds and 481,000 prepaid net adds. That gave it a decent postpaid phone churn rate of 0.93%, which only represents a slight increase from 0.82% in the second quarter. As a result, AT&T's Mobility revenues rose 5% annually to $17.9 billion.
WarnerMedia's revenue (which was included in AT&T's results for the first time) rose 6.5% annually to $8.2 billion, buoyed by the strength of HBO, Turner, and Warner Bros. AT&T also noted that its new advertising business, Xandr, grew its ad revenues by 34% annually (22% excluding the recent AppNexus acquisition).
Yet AT&T's other business units struggled. Its Entertainment Group revenue slid 5% annually to $11.6 billion as the addition of 49,000 new DirecTV Now subscribers failed to offset its loss of 346,000 traditional video subscribers. That business might be revived as AT&T bundles together DirecTV, DirecTV streaming services, HBO, wireless services, and wireline services together, but that strategy could also throttle its near-term earnings growth.
AT&T's Business Wireline revenue fell 4% to $6.7 billion, but the decline wasn't surprising since the company has been pivoting away from the enterprise market. Its Latin America revenues also dropped 12% to $1.8 billion, but the decline was entirely caused by unfavorable currency exchange rates. On a constant currency basis, the unit's revenues actually rose 5%.
AT&T's numbers were a mixed bag, but the big sell-off seems like a knee-jerk reaction exacerbated by a sell-off across the broader market. The earnings miss was disappointing, but AT&T stuck with its previous full-year guidance -- which indicates that the pressure should wane after it fully integrates WarnerMedia and repositions itself as a provider of bundled wireless, wireline, and streaming media businesses.
The bottom line
Some investors might think that AT&T's growth looks disappointing relative to Verizon's (NYSE:VZ). But that's an apples to oranges comparison -- AT&T is evolving into a diversified media giant, while Verizon is expanding more heavily into the online media and internet advertising markets.
At $30, AT&T trades at less than 9 times this year's earnings estimate, while Verizon trades at 12 times this year's earnings. AT&T's yield is also much higher than Verizon's forward yield of 4.2%.
Simply put, investors should still consider AT&T a stable income investment. The stock probably won't rebound significantly over the next few months, but it should continue to pay out reliable dividends for the foreseeable future.