AT&T (T) is a stock renowned for its dividend, but it got heavily beaten down following disappointing Q1 earnings earlier in the year. Thus, the Q2/2017 earnings were highly anticipated, and AT&T delivered, exceeded expectations, and saw its stock popping by 5% the next day. I added to AT&T both before and after earnings for a total of 20 shares. Here is why!
The company recorded Q2 sales of $39.8B (down $0.7B YoY) but shaved off even more in its operating expenses ($32.B; -$1.5B YoY) and thus saw stronger-than-expected net income and EPS.
What I liked most about the company’s earnings was the 2.8 million wireless net adds as well as the “best-ever postpaid phone churn of 0.79%“. The bundling success of AT&T and DirecTV is another very positive development as it improves customer lifetime value and leads to growing advertising revenues by subscriber.
Eventually, all these developments were driving the bottom line and saw AT&T’s EPS rise by 10% YoY.
To me as a dividend investor it is all about the dividend safety and sustainability, and given AT&T’s already high debt load (which is going to balloon to over $180B once the Time Warner (NYSE:TWX) merger is approved and gets closed) the relatively weak Q1 from AT&T was ringing my alarm bells.
On the Time Warner side the company expects to close this mammoth deal by year-end and has ensured the necessary liquidity to fund that acquisition. Two weeks ago the company was making headlines with the largest corporate bond offering in 2017 totaling $22.5B. And while I do believe in the rationale behind the merger and AT&T developing into a king of content, the massive debt level remains concerning and will be monitored diligently.
Strong cash flow in Q2, with operating cash flow of $8.9B and free cash flow of $3.7B, helped ease these concerns. With a current dividend of $0.49 per share this translates to a reasonable FCF ratio of around 81% and leaves room for future growth.
The latter is particularly important to the…