When a Company Has to Constantly Tell You Its Dividend Is Safe
Telecom giant AT&T's (T) stock has been clobbered recently, and for good reason...
As big as it is, with a market cap of roughly $100 billion, AT&T is increasingly looking like a company in peril.
Look no further than its free cash flow, which was $1 billion last quarter. That's a lot of money, except it was one-third of what investors were expecting... and about half the company's dividend payout.
Since then, AT&T now faces a new migraine: fallout from a Wall Street Journal investigation into potentially toxic lead network cables that are buried throughout the country. And since AT&T has the biggest coverage, it's generally believed to have the most exposure.
At risk, it would seem, is AT&T's dividend, which was cut and frozen last year after the company spun off its WarnerMedia unit...
For any company as iconic and large as Ma Bell, cutting a dividend is like a whisper... Freezing it is like a tap on the shoulder.
Eliminating it would be a brick on the head. This would also be a disaster for the stock, which has lost half its value in less than four years...
Before we go further... I should mention the reason I started digging into AT&T was to refresh myself on the company for a discussion on CNBC's Last Call. (You can see a short clip right here.)
In an effort to get a handle on what management has been saying, I put the word "dividend" in the search bar on Sentieo – the primary database I use for transcripts and filings – and started scraping through them...
This is my idea of fun, and it wound up being even better than I had expected...
As it turns out, dividend safety has been raised at AT&T's past two annual meetings...
And not just dividend safety, but the specific question, asked for investors by a company officer: "Is the dividend safe?"
Both times William Kennard, the company's independent chairman, has responded with a similar answer. In 2022, he said (emphasis added)...
The Board believes that with management's successful repositioning of the business, AT&T has the financial flexibility needed to allow the Board to sustain the dividend at current levels while enabling the company to reduce its leverage. AT&T continues to be among the highest dividend yield payers among the Fortune 500.
And here's what he said this year (emphasis added)...
As a Board, we know the importance of our dividend to our stockholders. And we feel very comfortable with the level of our dividend. We all know that AT&T is among the highest dividend yield payers in the Fortune 500...
The board is fully supportive of management's capital allocation strategy to invest for long-term sustainable growth.
That last line is exactly you would expect Kennard to say...
But it was his comment about AT&T being among the highest dividend yield payers in the Fortune 500 that caught my attention.
In fact, CEO John Stankey said almost the exact same thing at the company's Investor Day in March 2022 – mentioning in his scripted comments that AT&T's dividend yield is "near the top of the Fortune 500."
The company reiterated the line a few weeks later in a press release announcing that its board had approved the dividend cut... saying that even with the cut, "AT&T's stock remains among the best dividend-yielding stocks in the United States and the Fortune 500."
Management has repeated the line multiple times since then. It was even sentence in this year's proxy statement, where AT&T reminded everybody that "we remain one of the highest dividend-yielding stocks in the Fortune 500."
Talk about something straight out of Crisis P.R. 101...
Saying its dividend yield is one of the highest in the Fortune 500 is not unlike a company whose accounting is under fire telling you that its numbers were blessed by its auditors.
It's a hollow statement...
The reality is that it's irrelevant if AT&T company is in the Fortune 500, and saying so over and over is pure blather in an effort to create the illusion of strength.
A high dividend yield, meanwhile, can be a blessing and a curse: a blessing if the company is truly misunderstood by investors, and has the cash flow and balance sheet to support itself... but a curse if this isn't the case.
You've heard of junk bonds, which pay high yields to compensate for the risk of buying the bonds of a company whose financial health is dubious...
High-yielding stocks can be similar. For the good companies, you're paid to wait... For the bad companies, you're paid to take risk.
With AT&T, it's the latter.
The late Geraldine Weiss, who published the newsletter Investment Quality Trends, wrote a book called Dividends Don't Lie: Finding Value in Blue-Chip Stocks. Her successor, Kelley Wright, wrote a follow up years later, Dividends Still Don't Lie: The Truth About Investing in Blue-Chip Stocks and Winning in the Stock Market.
They're both based on something Weiss dubbed the "dividend yield theory," which helped determine the value of a stock. As she told Forbes back in 2002...
Most people believe earnings, but they can be manipulated, which we are seeing with Enron. Dividends are real money. That's the hallmark of a blue-chip stock.
And that's my point...
AT&T’s dividend IS real money. And constantly saying that it’s in the Fortune 500 and pays a big yield is mind-numbingly meaningless.
At this point the only thing that matters is whether it has the cash to keep paying that dividend. It’s never a good sign when a company has to keep reassuring investors that it does.
Final point: With the company's stock as pummeled is and its second-quarter earnings report coming up next week, any whiff of good news – especially with cash flow – could cause AT&T’s battered stock to bounce…
On the other hand, if there’s a even whiff of bad news, there may not be enough doors at the exit to fit everybody through.
AT&T has an enormous credibility problem. As big as it is, blue chip it ain't.
DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts, and should not be construed as investment advice.
(I write two investment newsletters for Empire Financial Research, Empire Real Wealth and Herb Greenberg’s Quant-X System. For more information, click here and here.)
Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter and Threads @herbgreenberg.
I would wait after AT&T's Q2 to see if they really have problem, or not. As for free cash flow, which is totally impacted by spending, I would trust the Company's saying than those analysts' doomsday prediction!
Thank you Herb. Pundits have been heralding the stock as one of the best dividend stocks for retail investors so it's great to read your balnced, detailed analysis.