AT&T’s (T) dividend yield looks quite juicy, standing at 5.89 percent as of March 28. But all that glitters isn’t golden. That hefty dividend payment may not last.
One rule of thumb is that dividend payouts shouldn’t equal more than 50 percent of net income. The telecommunications giant is right at that threshold. Last year’s dividend totaled $1.68 a share, just over 50 percent of the company’s 2010 earnings of $3.35 per diluted share.
In addition, some of AT&T’s earnings strength in 2010 came from extraordinary items. Stripping out the 13 cents per share of earnings that came from discontinued operations last year puts the payout ratio at 52 percent.
Meanwhile, the much-ballyhooed $39 billion agreement AT&T negotiated to take over T-Mobile may not be as beneficial as some claim. AT&T will likely have to make many sacrifices to overcome the concerns of federal regulators that the merger would limit competition in the telecommunications industry. Those sacrifices could put the dividend in jeopardy.
“We have never seen a deal with more regulatory risk be attempted in the U.S.,” Jonathan Chaplin, a telecommunications analyst for Credit Suisse, wrote in a research note. “It is unlikely that AT&T would attempt a deal that they knew would fail. However, we can’t see how they would get this through without massive divestitures and concessions.”
A merger would give AT&T and Verizon control of about 80 percent of the national telecommunications market, reinforcing Chaplin’s point about divestitures and concessions.
“This is a significant horizontal consolidation by all the traditional measurements,” Reed Hunt, former chairman of the Federal Communications Commission, told CNBC. “This level of concentration, two-thirds of the time, has been rejected by the Department of Justice.”
So what will AT&T have to give up to gain regulatory approval for the merger? It would have to cede a great deal of spectrum to create a real national competitor for itself and Verizon, Andrew Ross Sorkin of The New York Times points out.
“Lesser concessions could include commitments to make their networks open to competitors through roaming agreements and reseller agreements and allowing other carriers to sell service on AT&T’s network under another brand . . . (as) Verizon had to do in 2008,” he writes.
One metric you always want to look at in assessing the sustainability of a company’s dividend is the dividend of its major competitors. AT&T’s dividend yield exceeds Verizon’s by 14 percent — 5.89 percent for AT&T, compared to 5.16 percent for Verizon. That’s not a positive sign for AT&T.
© 2016 Newsmax Finance. All rights reserved.