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AT&T Just Secured $5.5 Billion in New Debt: What It Means For Its Dividend

By Will Healy – Apr 14, 2020 at 7:45AM

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Shareholders should feel better about the telecom's generous dividend payout continuing despite economic headwinds.

AT&T (T 1.20%) just received approval for a $5.5 billion loan. The telecom giant has seen its stock price fall roughly 23% since the start of the year as coronavirus-related fear led investors to sell. It dropped, in part, because the company suspended its stock buyback amid the sell-off. AT&T also announced a plan to lay off workers and scale back operations.  

These decisions (along with the $5.5 billion capital infusion) increase the company's flexibility in the current economic uncertainty created by the coronavirus pandemic. A significant question now for investors is how the additional cash will affect the telecom's ability to maintain its dividend.

AT&T faces tremendous financial obligations

Next to ExxonMobil, AT&T pays the highest dividend yield among Dividend Aristocrats. For 2020, the annual payout for this tech stock is running at $2.08 per share. This amounts to a dividend yield of approximately 7% at current prices. At first glance, the payout appears expensive but sustainable for the company. With a payout ratio of about 59.1%, a majority of profits go to the dividend. Still, that leaves a significant amount of cash free for other purposes.

But is that enough?

From a certain point of view, one might assume AT&T was in for a dividend cut. The current yield is more than triple the current S&P 500 average, around 2.2% as of the time of this writing.

Woman using smartphone at her desk.

Image source: Getty Images.

Moreover, AT&T faces many other financial obligations. Long-term debt stood at about $151 billion at the end of 2019. Given stockholders' equity of around $201.9 billion, this debt places a considerable strain on the company's balance sheet.

AT&T spent about $19.64 billion in capital expenditures in 2019. In each of the previous four years, this expense amounted to over $20 billion each year. The company spends the majority of this cash on its infrastructure. Like Verizon and T-Mobile, it must invest heavily in a 5G network to remain relevant in the wireless industry.

Furthermore, it added to its costs by not focusing exclusively on 5G. It also acquired DirecTV and WarnerMedia (formerly Time Warner) to enhance its media interests. Some had expressed doubts about AT&T pursuing this strategy. DirecTV has lost considerable value since AT&T bought it. Entering the content race with WarnerMedia means the company also faces intense competition from the likes of Netflix and Disney.

The coronavirus hit to the economy intensifies this pain. With no live sporting events, the job of attracting viewers to DirecTV becomes even more difficult. With movie theaters closed, the ability to get box office revenue from Warner Bros. movies is greatly reduced. This concern led to an analyst downgrade and a drop in AT&T stock earlier this month, as a potential divestiture of these assets would only happen at lower prices in the current market.

AT&T's dividend conundrum

Investors also need to remember that the dividend payout brings with it costly expectations. The company earned the aforementioned Dividend Aristocrat status by hiking its payout for 35 straight years. Due to the company increasing payouts for that long, investors have come to expect that the increases will continue every year.

Ending that streak would likely lead to further selling of the stock. For one, funds that invest only in dividend aristocrats would have to sell. Other investors and institutions would probably dump the stock as well. Worse, such a move could lead to questions about the company's longer-term financial stability.

Hence, the loan and the halt on buybacks may benefit AT&T stock overall. This additional liquidity gives the company the ability to continue increasing the dividend. Dividend payments cost AT&T around $14.89 billion in 2019. The company also holds about $12.13 billion in cash. Adding a cash cushion makes the dividend more affordable. The fact that AT&T saw an increase in cash of almost $6.9 billion last year should also further boost confidence.

This creates a tempting prospect for potential buyers. Investors who purchase now will earn a hefty dividend yield, along with a high likelihood of further increases. Moreover, they can buy that income stream for around 8.4 times forward earnings. On average, AT&T sold for a P/E ratio of about 17.4 over the previous five years.

AT&T's payout appears more secure

The new loan, along with the buyback suspension, bolsters the strength of an already generous dividend. This increases the likelihood that AT&T's streak of payout hikes will rise to 36 years and beyond. Moreover, thanks to the recent drop in the stock price, prospective buyers can also purchase this company at a low multiple.

Even when accounting for the company's existing debt load and its massive expenses, the payout and the long streak of dividend hikes make AT&T stock worth considering.

Will Healy owns shares of AT&T and ExxonMobil. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool recommends T-Mobile US and Verizon Communications and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.

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