In 2021, AT&T (T 1.99%) decided to spin off its DIRECTV and WarnerMedia divisions to raise capital to reduce its massive debt. Many shareholders undoubtedly hoped it would save the dividend streak that had made it a Dividend Aristocrat.
Unfortunately for income investors, AT&T revealed last year that it intended to slash the payout despite the cash the company will receive from the spinoffs. Now, with the Dividend Aristocrat status lost, such moves understandably leave AT&T investors wondering whether AT&T is still a great dividend stock.
The coming dividend cut
In AT&T's second-quarter 2021 10-Q filing with the Securities and Exchange Commission, the company said it would adjust payout distributions to approximately $8 billion to $9 billion per year once the Warner Media spinoff is completed. Since AT&T distributed almost $15 billion to shareholders in 2020 (and probably also 2021), this will significantly reduce the payout.
With this dividend adjustment, AT&T walks away from a streak of consecutive payout hikes dating back to the mid-1980s. Companies face no obligation to pay a dividend. For this reason, income investors tend to rely on dividend increase streaks to maintain their confidence in the payout. Without such a streak, income investors may look to other stocks.
How the dividend cut helps AT&T
Despite that confidence issue, some analysts argue that the payout reduction will help AT&T start rebounding in 2022. The annual payout of $2.08 per year amounted to an 8% cash return, well above the S&P 500 yield of around 1.25%. Moreover, the total debt of $179 billion represents a tremendous burden for a company worth $181 billion when subtracting liabilities from assets.
From this standpoint, the spinoffs and lower dividend cost offer welcome relief to AT&T. The DIRECTV spinoff involved selling 30% of DIRECTV's assets, which netted the company more than $7 billion. After AT&T completes the WarnerMedia spinoff, it will receive $43 billion.
Those proceeds, along with the savings from the dividend cut, are expected to reduce AT&T's debt. And shedding those businesses will make it more like its 5G-focused peers, T-Mobile and Verizon, though Verizon once invested a combined $9 billion in Yahoo! and AOL before spinning off those businesses.
The spinoffs will also provide capital to keep AT&T competitive. AT&T spent almost $13 billion, or 10% of its operating revenue, in capital expenditures in the first nine months of 2021. Over the same period, Verizon spent about 14% of its revenue on CapEx, while T-Mobile allocated 22% of revenues to property and equipment, indicating AT&T may need to increase spending.
AT&T's remaining challenges
Nonetheless, slashing the payout may give investors few reasons to buy a stock that has suffered for decades. AT&T stock first reached its current price in the mid-1990s. Though it has fluctuated since then, the dividend returns represented the positive returns on AT&T stock in many cases.
Moreover, AT&T's dividend investors could decide to turn to its longtime archrival, Verizon. Verizon's $2.56 per share annual payout now yields a 5% cash return. And although Verizon is not a Dividend Aristocrat, its 17-year streak of payout hikes can boost confidence in the stock. Verizon is also heavily indebted, but it easily produces enough cash flow to cover the dividend cost and modest annual increases. Verizon produced $17B in FCF and paid out $8B in dividends in the first three quarters of 2021. Verizon holds $151B in total debt.
Furthermore, while the spinoffs and dividend cut should reduce AT&T's debt, its obligations will likely continue to burden the company. Even if the proceeds from the spinoffs go to debt reduction, it would still leave AT&T with $129 billion in debt. That amounts to about 71% of the company’s stockholders’ equity, the value of AT&T after subtracting liabilities from assets.
Is AT&T still a great dividend stock?
Although cutting the payout will probably keep the dividend yield far above the S&P 500 average, income investors may want to stay away from AT&T stock. The lack of gains since the mid-1990s has given growth investors little reason for optimism.
Moreover, income investors are no longer protected by a streak of payout hikes. Thus, AT&T could cut the payout further should it need the cash for debt reduction or capital expenditures. Given that danger, AT&T will need to spend years proving it can maintain a streak of payout hikes before dividend investors can again have confidence in the telecom stock.