Forget AT&T: This Telecom is a Better Dividend

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AT&T (NYSE: T) has been a popular dividend-paying stock for many years due to its relative stability, brand awareness and high yield. The company is a dividend aristocrat – meaning it has increased its dividend each year for at least 25 consecutive years – and is currently earning 6.8%.

However, AT&T has grown into an extremely complex business due to its history of acquisitions. Management’s track record of making good acquisitions and integrating them well is fragile at best. This makes AT & T’s high leverage especially risky. On the other hand, Technologies Lumen (NYSE: LUMN) offers a higher yield despite a lower dividend payout ratio and a simpler business that involves less risk for investors. This makes Lumen a more attractive dividend-paying stock.

Strategic confusion reigns at AT&T

AT&T has made two massive acquisitions since 2015. First, it acquired satellite TV provider DIRECTV in 2015 for a total enterprise value of around $ 67 billion. Three years later, he closed the Time Warner acquisition, investing more than an estimated $ 104 billion for the entertainment giant. These two deals played an important role in increasing AT & T’s indebtedness. At the end of the last quarter, AT & T’s debt stood at $ 158.9 billion, down slightly compared to $ 163.1 billion at the start of 2020.

Image source: Getty Images.

In hindsight, the DIRECTV deal was a huge mistake, though AT&T management never admitted it. The deal came about just as the trend to cut the cord was accelerating. AT&T has suffered the worst subscriber losses in the US pay television industry in recent years.

AT&T is now set to sell a major stake in DIRECTV (excluding the relatively small satellite business in Latin America) for a valuation of just over $ 15 billion, according to The Wall Street Journal. It sounds like nothing more than financial engineering. AT&T just wants to take DIRECTV off the books – even though selling part of the business at a low valuation will reduce its free cash flow for a relatively low cash infusion.

The Time Warner acquisition seems to be only slightly more successful. AT&T CEO John Stankey and new WarnerMedia boss Jason Kilar have shaken up the media company’s business model, focusing all of its resources on building HBO MAX as Netflix competitor. This hurts short-term profitability. Sadly, HBO MAX got off to a bumpy start due to confusing branding as one of the many variations of HBO. After more than six months, it only has 12.6 million subscribers. That’s a fraction of HBO’s subscriber base, even though HBO MAX is a free upgrade from the first. On the other hand, Walt disneyDisney + launched last November and already has 86.8 million subscribers worldwide.

AT&T will need to invest heavily in HBO MAX to gain adequate scale. If it does not grow enough to offset the decline in AT & T’s business, free cash flow could continue to decline from the $ 26 billion forecast in 2020 and 2021. This in turn could jeopardize the dividend, which costs around $ 15 billion a year. year, placing AT & T’s dividend payout ratio between 57% and 58% (as a percentage of free cash flow).

AT&T Free Cash Flow vs. Dividend Payments. Data by YCharts. TTM = last 12 months.

There is a better alternative

In contrast, Lumen Technologies – formerly known as CenturyLink – pays a quarterly dividend of $ 0.25 per share. This gives it a 10% return, easily outperforming AT&T. Additionally, Lumen typically generates at least $ 3 billion in free cash flow per year, so the $ 1.1 billion it pays out in dividends represents a payout ratio well below 40%. The combination of a higher yield and a lower payout ratio makes this a more intriguing dividend-paying stock from the start.

To be fair, Lumen’s debt is higher than AT&T’s to earnings before interest, taxes, depreciation and amortization (EBITDA). However, thanks to its low dividend payout rate, it was able to get out of debt quickly. It ended the last quarter with $ 32.6 billion in debt, up from $ 36.1 billion at the start of 2019.

Between Lumen’s deleveraging and refinancing efforts, interest expense is expected to decline to $ 1.7 billion this year from $ 2.2 billion in 2018. Annual interest charges will likely continue to decline to around $ 1 billion. , $ 2 billion and $ 1.3 billion by 2023. free cash flow and potentially allow Lumen to start increasing its dividend in a few years.

There is a clear winner

AT & T’s wireless business and fiber broadband service are stable earnings generators supporting its high dividend. However, AT&T also has substantial exposure to declining industries like pay television. Its haphazard response to changes in the way people consume content does not inspire assurance that the company can maintain (let alone increase) the profitability of its entertainment business.

Lumen is also exposed to declining markets such as legacy voice services and DSL Internet. However, rather than devoting resources to trying to revive struggling businesses, management is focusing on leveraging its extensive fiber optic network to capitalize on the growing demand for low latency internet connections.

With a higher dividend yield, better dividend coverage and less operational risk in the business, Lumen Technologies is a much more attractive dividend-paying stock than AT&T.

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