The 6.5% dividend yield is one of the most appealing aspects of AT&T (NYSE: T), a telecommunications behemoth. One of the main draws for many stock investors is the payout.
While investors have seen a return on their dividends, AT&T has been a middling investment over the years.
Eye-Catching Headline Highlights Disappointing Long-Term Returns
You would have $476 now if you had put $100 into AT&T in 1995, reinvested the dividends, and waited. Considering the S&P 500 increased that $100 to $1,200 in the same time period, it’s not terrible.
Instead of losing money, the investment has multiplied thanks to AT&T’s dividend. However, overall returns lag significantly behind the market as a whole.
Even with the dividend, AT&T’s problematic economic model remains. Delving further, underlying flaws become apparent over the course of decades; these flaws contribute to the underwhelming returns.
AT&T’s Returns on Invested Capital Turn Negative
An excellent business will put money into the company and get a return on that investment. This is quantified by the return on invested capital (ROIC). Companies with greater ROICs generate more value from their investments.
Originally in the double digits, AT&T’s ROIC has now dropped below zero. This goes against what investors want to hear: that AT&T is now eroding value whenever it invests in the company.
Earnings Per Share Lower Than Nearly 30 Years Ago
In the long term, stock returns are driven by earnings growth. Still, compared to 1995, AT&T’s earnings per share are approximately 20% lower now. Variable throughout the years, but recently diminished due to large purchases.
Not the kind of growth one would anticipate from a well-established firm that was formerly a blue chip stock.
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Debt Levels Balloon Over 1,750% Higher Since 1995
Taking up a substantial amount of debt has been the primary means of funding purchases. AT&T’s current debt load of $138 billion is more than 17 times higher than its debt load in the mid-1990s.
Debt servicing costs money. Interest alone cost AT&T $6.5 billion in the previous year. Money that, had leverage been more appropriate, could have gone to shareholders or invested in the firm itself.
The company prioritized empire building over creating value for long-term shareholders.
Spin-Offs and Debt Paydown: First Steps in a Long Turnaround
Over a hundred billion dollars was spent by AT&T last decade for the entertainment assets of Time Warner and DirecTV. In recent years, the firm has spun off both of these enterprises after failing to make a profit from them.
There is reason for optimism, as the funds have been used to decrease debt by approximately $40 billion. Instead of losing all of it to interest, this frees up cash flow.
However, the overall debt level is still quite high. It is still up to AT&T to demonstrate that it can expand its cellular and telecom operations. In the years to come, experts predict a meager 3% increase in yearly revenues, which is not promising.
The ability to appropriately reinvest in the company is a vital competency that managers must demonstrate. ROIC needs to get back on its feet after the recent loss of value and handle things appropriately once more.
Can a Dividend Darling Turn Back Into a Quality Business?
The path to recovery for AT&T is lengthy. If management maintains their discipline, the balance sheet might recover in the next years. However, there may be room for improvement in operational growth.
Over the years, faithful investors have reaped some benefits from the dividend’s allure. But for most of that time, the company’s fundamentals show that it is defective.
Decent, if not great, despite the allure of the potential profits. In order to regain its status as a blue chip investment, AT&T needs to do more than simply pay dividends; the company needs to improve itself.