What's next for AT&T after T-Mobile?
Dividend investors might want to buy in now -- and consumers shouldn't count the deal as dead.
By Jeff Reeves, Editor of InvestorPlace.com
Dividend stock investors have been fond of telecom stocks in 2011, including Verizon (VZ) and AT&T (T). The two biggest players in the U.S. wireless market offer dividends that have been hovering around a 6% dividend yield for many months.
Unfortunately for AT&T stock investors, a planned $39 billion acquisition of T-Mobile USA -- a subsidiary of Germany telecommunications giant Deutsche Telekom (DT) -- looks increasingly doubtful. Both companies announced over Thanksgiving that they are withdrawing their merger application with regulators.
Corporate honchos haven't bothered to put on happy faces, either. AT&T announced it will start placing $4 billion aside to pay for the very hefty break-up fee due to Deutsche Telekom if the buyout ultimately fails. Not an inspiring move.
To be clear, it was not an antitrust suit that squashed things. AT&T yanked its merger request on its own. But clearly the move was to avoid an intense antitrust investigation or review by a judge -- hinting that even if the deal has potential, at the very least the first proposal by the telecom stock wasn't going to be seen favorably by regulators.
So what's next for AT&T stock? The question investors need to ask themselves is whether AT&T is worth hanging onto in light of these developments. There is not just the strategic loss of T-Mobile weighing on the stock now, but also the prospect of that $4 billion break-up fee -- roughly 12% of the company's quarterly revenue (about $31.5 billion) and about 40% of its annual dividend payments to shareholders (just north of $10 billion in 2011).
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But let's not overreact. Execs say they will resubmit the merger request. In a statement this weekend, AT&T made it painfully clear that the FCC cannot review its prior proposal and it is making a strategic move to voluntarily revise its proposal before regulators look under the hood. Some telecommunications insiders expect to see AT&T write in a stipulation it will sell off a huge chunk of T-Mobile's assets -- which it might not need anyway, considering the fact it already is one of the biggest fish in the wireless pond.
A New York Times article Sunday speculated these assets would either go to wireless rivals like Sprint (S) as a way to ensure regulators don't label the move anticompetitive, or to a cash-rich foreign telecom like Carlos Slim's America Movil (AMX) that would be willing to use the castoffs as a way to springboard into a lucrative U.S. market. Those schemes clearly aren't in the best interest of AT&T, but the "peace offering" would win over some detractors without spoiling the gain of 33 million subscribers that AT&T desires.
Beyond that, we should remember the basic fact that AT&T is part of an existing duopoly in the U.S. wireless market and will remain entrenched. The No. 3 carrier in America, Sprint, hasn't turned a profit since 2007. It pays no dividend, does about $33 billion in revenue annually and has a market capitalization a bit over $7 billion. AT&T yields over 6%, does $125 billion in annual revenue and is more than 20 times the size with a $160 billion market cap. It's not like it needed this deal, and it's not like anyone else other than Verizon is offering a competitive threat.
Besides, a 6.2% dividend as of last week could become even more plump if shares sell off across the next few days. True, the only substantive growth in store for AT&T is through mergers like the T-Mobile deal -- but full-year 2011 earnings are tracking $2.32 per share, up about 20% from EPS of $1.94 in fiscal 2007 right before the financial crisis. Revenue is set to top $126 billion in 2011, vs. almost $119 billion in 2007. It's not like AT&T is seeing its numbers backslide, even if the stock remains down about 35% from its pre-recession peak above $42 a share.
If you are a active trader, there probably is little chance you would ever consider monkeying around in AT&T stock for a swing trade. And if you're a long-term stock investor, there are many reasons to be skeptical. Chances are AT&T will remain sleepy and won't set off any fireworks -- or, worst-case scenario, continue to backslide if the T-Mobile deal dies for good and the market remains volatile.
However, income investors may find AT&T an important part of their portfolio even without this acquisition coming to pass. Yes, the $4 billion break-up fee is a huge chunk of change and might eat into dividend increases -- but the idea that AT&T would cut its existing dividend as a result is far-fetched. With annual operating cash flow of $34 billion and $10.7 billion in cash on its books as of Sept. 30, the existing 43 cent dividend per quarter remains very safe and sustainable.
And even if 2012 doesn't see a dividend increase, a 6.2% yield is nothing to sneeze at. Your AT&T stock will pay for itself about 12 years at that rate -- and considering the 10-year T-Note is once again flirting with a yield under 2%, there aren't a lot of alternatives these days.
I would hang on to AT&T for the dividend or consider buying more if you're an income-oriented investor. The T-Mobile drama won't change the fundamental fact that AT&T pays a big, reliable dividend.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.
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