Has AT&T Peaked?

The U.S. telecom giant may boast a rising stock and generous dividend payouts, but is it a good investment today?
By Chiradeep BasuMallick ,

Shares of U.S. telecom giant AT&T (T) - Get Report have gained 25% in just six months, outperforming rivals like T-Mobile (TMUS) - Get Report (up 8.9%), Sprint (S) - Get Report (up 7.3%), Verizon (VZ) - Get Report (down 1.9%), and Vodafone (VOD) - Get Report (down 3.9%).

Investors have always loved AT&T for its generous dividend payouts, driving its stock upward.

However, there are some very serious chinks in AT&T's armor. With the stock rising way too fast, too soon, and its dividend yield deemed unsustainable by some Wall Street analysts, there's a strong possibility that stormy weather is right around the corner.

Fact is, there's little gas left in the tank for this telecom giant. Here's why.

This Size Does Matter

The $261 billion market value heavyweight stands tall on a solid foundation: a fully integrated telecom solution provider.

In the United States, the company offers TV and wireless nationwide, in addition to having a large high-speed Internet footprint. On the enterprise side, it brings advanced services to 3.5 million businesses on six continents.

Led by Randall Stephenson, one of the highest paid executives in the tech industry, AT&T's stock price has witnessed a sharp upswing in the recent past.

No Longer a Value Stock

Let's look at the numbers. Valuations can always point to any overbought state in a stock. How does AT&T fare?

We use a five-year expected price-to-earnings-to-growth (PEG) ratio to assess whether AT&T is exorbitantly mounted.

With a PEG ratio of 1.58, AT&T looks costly compared to global peers Orange(0.44), America Mobil (0.58), and local peer T-Mobile (1.02) but cheaper than Verizon (4.33). Vodafone has a negative PEG ratio.

AT&T, with its advanced mobile services, next-generation TV, and high-speed internet strengths, isn't really a value proposition after the recent run-up in its stock price.

Just to be sure, let's look at another valuation metric, enterprise value/EBITDA (trailing twelve months): AT&T stock is trading at an EV/EBITDA of 7.72, which is far higher than the usual five-to-six times figure of most telecom carriers.

Only Vodafone sports a higher EV/EBITDA, of 9.8-times.

The Dividend Mirage

The other principal reason why investors choose to buy AT&T has been its so-called safe dividends.

Admittedly, the 4.5%-plus yield is mouthwatering, and the track record of having paid 31 consecutive years of increasing dividends is a comfort zone that's akin to a steady-income reservoir.

Peer Verizon also offers a 4%-plus dividend yield, but analysts are beginning to question whether this high-yield chase has run its course.

Analysts at Citigroup are certainly wary of buying the AT&T stock right before its dividend announcements. The Wall Street bank argues that yields could drop once U.S. interest rates manage to rise.

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AT&T's payout ratio at 67.1% is a bit higher than Verizon (57.7%).

A Growing Debt Monster

This is even more worrying the giant debt-burden: Beyond the $10 billion annual dividends paid by AT&T, the current debt pile of $133 billion isn't really comforting.

Its debt/equity ratio at 1.0 is higher than global peers like Nippon Telegraph (0.4), Vodafone (0.4) and Singapore Telecommunications (0.4). This debt pile costs AT&T $4 billion as interest expense annually.

With annual free cash flow on the wane since 2012, we don't think the strategy of accumulating massive debts and concurrently paying more dividends will sustain for too long. Its cash pile at $10.11 billion can get through only one year of current dividends.

Unless its free cash flow rises, AT&T will have to load up on debt to bankroll higher dividends.

AT&T's stock is pricey on several valuation metrics and the dividend isn't as solid as people might imagine it to be. It's safer to book profits if you have made any on this trade, before the stock drops and erodes even that silver lining.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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