For those investors seeking high yields, AT&T (NYSE:) is a stock that immediately grabs attention. America's largest telecom operator is currently offering what appears to be a very attractive risk-return proposition for income investors.
The stock now yields on average more than five times what the companies offer on the stock exchange. With an annual return of 7.4%, investors can get one of the best returns available on a blue chip stock with a long track record of paying dividends.
But that return is not without risk. Shares of the Dallas-based company have underperformed the benchmark S&P 500 for years. They have fallen 35% in the past five years – a period in which the S&P 500 more than doubled. Shares traded at $28.02 at yesterday's close.
AT&T's dismal performance is a reflection of the company's debt-laden acquisition strategy, which has so far failed to unlock value for its shareholders. For example, the company has lost nearly 10 million TV customers since its acquisition of DirecTV satellite service in 2015.
To address these challenges, AT&T is undergoing an aggressive turnaround plan, shifting its loss-generating TV business to a joint venture with TPG Capital and its media brands, including HBO, CNN, TNT, TBS and the Warner Bros. studio – a new publicly traded company with Discovery (NASDAQ:) next year.
"We want to achieve a strong exit rate with both companies, after which the combination with the right partner will only expand to their respective chances of success," said Chief Executive John Stankey during a conversation with analysts last month.
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Dividend at risk
But that restructuring has raised doubts among investors about the stability of the company's quarterly dividend of $0.52 per share.
Chart: Investing.com
According to an Investing.com poll of 30 analysts studying the stock, 14 have a neutral assessment of the stock, with nine recommending a buy and seven recommending a sale.
Argus Research in a recent note downgraded AT&T's love-buy rating, saying the company's transformation could lead to a dividend cut in the near term.
The note read:
"While management has assured investors that AT&T will maintain a dividend in the '95th percentile' of companies, the math just doesn't work after taking into account the spin-offs of DirecTV and WarnerMedia. If such, we will take a wait-and-see attitude as the company restructures through major divestments while implementing its costly 5G network expansion.”
Despite this pessimism, AT&T's move to create a new streaming giant means HBO, Warner Bros. and AT&T's TNT are paired with a range of Discovery channels, including the Food Network, and reality TV shows, giving the company a better chance of succeeding in a market where deep-pocketed tech companies like Apple (NASDAQ:) and Amazon (NASDAQ:) Spending tens of billions of dollars a year on media content.
AT&T reported about 67.5 million worldwide subscribers to its premium channel and streaming service last month, and now says it will have 70 million to 73 million by the end of 2021.
Bottom Line
AT&T is likely to become a much leaner and more focused company next year if it can successfully complete its current restructuring. The separation of its media assets allows it to invest aggressively in its new streaming unit, while positioning its core telecoms business to expand as the introduction of 5G technology creates new opportunities.
That said, the new AT&T is unlikely to please investors striving to earn steadily growing income. AT&T, in our view, is now a turnaround bet rather than a company that pays stable dividends.
