To income investors, there are few companies more widely known than AT&T (NYSE:T). And that makes sense, the company's massive 5%-plus dividend is nearly double the 10-year Treasury's yield. However, many dividend investors focus on its current yield rather than its potential yield -- and that's a problem. Here are three reasons why income investors eyeing AT&T might want to reconsider the company.
Wireline is a problem
AT&T's legacy business -- its wireline business -- is struggling. And while that's to be expected in the current environment as wireless continues to grow, it is still a rather large part of AT&T's revenue. In 2013, wireline provided a large part of AT&T's revenue by coming in at 46% of the total revenue.
The issue is the division continues to underperform in both revenue and segment income standpoint. Last fiscal year, the company actually reported its second consecutive revenue drop in wireline with a 1.3% decrease. In addition, spurred by higher operations and support costs and less depreciation expenses, the segment's income decreased a massive 13.4%.
For what it's worth, the company doesn't expect the trend to reverse itself soon. According to its most recent annual report, "We expect continuing declines in traditional access lines and in traditional telephone service revenues." Although its wireless business is performing well, wireline will continue to be a drag on the company.
Our plan for growth waters shareholders down
AT&T's plan for growth is to buy DirecTV (NASDAQ:DTV) and its 20 million U.S. subscribers in order to increase its average revenue per user. In cases where it has its "triple play" bundle (AT&T has a small pay-TV service named U-verse), ARPU is nearly $170 per customer . However, AT&T is planning to issue nearly 900 million shares to pay for the new acquisition.
Although they get a business that's provided nearly $2.9 billion in both net income and free cash flow over the trailing 12 months, they are paying $49 billion. Of course, the company is buying a new business, but on both a price to free cash flow (16.9) and price to earnings ratio (16.9), DirecTV is more expensive than AT&T, which comes in at 14.2 times and 10.5 times, respectively. The end result is more shares outstanding and a business more richly valued and dependent on growth.
Dividend increases have been small and may be smaller
In addition to high dividend payouts now, prudent dividend investors want to see a history of generous dividend increases, and AT&T doesn't have that recently. Since 2008, the company has increased its dividend per quarter from $0.40 to its current total of $0.46. That amounts to a total increase of 15%, or an annualized rate of 2.4% -- less than the long-run rate of inflation.
Adding 900 million more shares has the potential to further slow dividend increases by increasing the overall payout. In addition, the company embarked on a rather ambitious share repurchase plan during the last two years by buying back nearly $27 billion of its shares -- good for 729 billion shares -- this share issuance will totally reverse this and adds $1.7 billion in additional dividends at current payout totals. If DirecTV fails to provide the growth or free cash flow, dividend increases could be hard to come by.
AT&T has a potential game-changer as far as growth is concerned with its DirecTV acquisition. That said, current shareholders need this to pay off in order for AT&T to reverse its trend of low dividend increases. In addition, the pay-TV model is increasingly looking unsustainable as is among competition from Netflix and other streaming-based services.
If you are looking for a high-yielding investment, AT&T fits the bill. However, the upcoming share issuance and history of low dividend increases are the reasons why it isn't a top dividend stock.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.