The best dividend stocks give investors the valuable combination of current income and potential dividend growth in the future. For almost 30 years, telecom giant AT&T (NYSE: T ) has delivered annual boosts in its payouts to shareholders and offers the best yield among the Dow Jones Industrials. That track record has earned AT&T a place among the exclusive companies on the list of Dividend Aristocrats. To become a member of this elite group, a company must have raised its dividend payouts to shareholders every single year for at least a quarter-century. Only a few dozen stocks manage to make the cut, and those that do tend to stay there for a long time.
During that three-decade span of higher dividends, AT&T has seen the telecom business transform itself completely. After having broken up into component regional telephone companies in the early 1980s, AT&T focused on long-distance service, which used to reap huge returns from what seem now to be astronomically high charges for landline calls. As long distance got more competitive, AT&T suffered, and the regional telecom formerly known as Southwestern Bell bought up the long-distance unit in 2005 and took the AT&T name. Let's take a closer look at AT&T to see whether it can sustain its long streak of rewarding dividend payouts to investors.
Dividend stats on AT&T
| Current Quarterly Dividend Per Share | $0.45 |
| Current Yield | 5.1% |
| Number of Consecutive Years With Dividend Increases | 29 years |
| Earnings Payout Ratio | 135% |
| Last Increase | January 2013 |
Source: Yahoo! Finance. Last increase refers to ex-dividend date.
What's happened with AT&T lately?
AT&T's 5% yield has provided nearly all of the telecom giant's total returns over the past year, as the share price has actually dropped by less than half a percent since the middle of 2012. The lack of share-price appreciation points to the importance of dividends for income-producing stocks, but it also reflects the uncertainty investors have about how the company will find further growth.
Clearly, the biggest source of growth for AT&T in recent years has come from the explosion in smartphone use. By having been the original exclusive seller of the iPhone, AT&T locked in millions of early adopting customers seeking to get in on the mobile revolution. But eventually, competitors Verizon (NYSE: VZ ) and Sprint Nextel (NYSE: S ) muscled in on the iPhone action. AT&T still led its rivals with 4.8 million iPhone activations in the first quarter of 2013, but sales of 4 million Verizon iPhones and 1.5 million Sprint-activated iPhones helped push AT&T's overall share of iPhone sales downward, continuing a trend that has seen its overall market share cut in half since the fourth quarter of 2010.
With AT&T having failed to get its proposed purchase of T-Mobile past antitrust regulators and with smartphone use having already gone through its fastest-growth phase in the U.S., the best growth prospects for AT&T lie elsewhere. Recently, rumors have surfaced of potential buyouts that could bolster AT&T's international presence. One involved the potential breakup of Vodafone, with Verizon seeking to take 100% control of its Verizon Wireless joint venture with Vodafone while AT&T would get Vodafone's foreign telecom assets. More recently, reports came out that AT&T was interested in buying a substantial stake in Spain's Telefonica. But talk is cheap, and so far, AT&T hasn't made any firm announcements in the international M&A arena.
AT&T Dividend data by YCharts.
As you can see, AT&T has been somewhat stingy with its dividend growth lately, having made only token $0.01 increases every year since 2009. High earnings-based dividend payout ratios ignore the fact that the telecom company's GAAP earnings reflect massive non-cash writedowns for depreciation and amortization of its extensive assets, and the much more plentiful free cash flow is sufficient to support AT&T's dividends.
When will AT&T raise its dividends again?
AT&T just raised its regular dividend in January, so you shouldn't expect an increase until 2014. If the company ends up making a large acquisition, however, the big question for dividend investors will be whether AT&T adds to its already extensive debt load, uses stock in a move that could greatly dilute existing shareholders, or decides to reduce its payout to conserve cash. Until a deal actually gets done, though, that conjecture is mere speculation, and AT&T looks primed to keep delivering the consistent dividends that make it the Dow's dividend champion well into the future.
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