Dividends are big part of investor appeal for the big two wireless carriers. AT&T paid out close to $12 billion in dividends last year, for a yield of just more than 5%. Verizon distributed $9.3 billion on dividends last year -- more than the combined price tags of AOL and Yahoo!, two of its businesses -- and has a yield just below 5%.
"The dividend is sacred," Macquarie Capital analyst Amy Yong said, adding that capital expenditures and network upgrades are second in the list of priorities for cash. "It's really about managing both of those, having healthy dividend growth and keeping the network healthy as well." AT&T's purchase of Time Warner Inc. (TWX) would actually improve the telecom's dividend coverage.
"Both of these companies have very large retail customer bases, individual investors who rely on that dividend," said Barry Sine of Drexel Hamilton LLC. Some institutional investors can only invest in stocks that pay dividends.
None of the other players in wireless have such generous policies.
T-Mobile USA Inc. (T - Get Report) and Sprint Corp. (S - Get Report) do not pay a dividend. However, T-Mobile said in its July earnings call that it may start a "small" payout. Comcast Corp. (CMCSA - Get Report) and Charter Communications Inc. (CHTR - Get Report) , which are entering the wireless industry by reselling Verizon's service, pay yields of 1.5% and 0%, respectively.
Last year, AT&T invested $22.4 billion in its network, nearly double the amount it paid out in dividends. The company generated more than $39 billion from operations. The company expects $18 billion in free cash flow this year. The company said in its 10-Q filing that its board would have flexibility to increase the dividend.
Verizon plans $16.8 billion to $17.5 billion in capital spending this year. The telecom also noted that it has performed well in network surveys while spending billions on its dividend. JD Power gave it the top scores for wireless network quality earlier this year. The company also finished tops in RootMetrics' mobile performance tests for the first half of the year. T-Mobile touted its first-place performance in Ookla's network speed tests, and crowed that Verizon fell to third after launching unlimited data plans earlier in the year.
More of What's Trending on TheStreet:
"Those dividends certainly are supportable," said Sine, noting that the companies can raise debt financing at low rates. "As far as I can see the appetite for their debt will continue unabated for some time."
The competitiveness of the wireless industry has been "a bit overstated." he added. All four carriers added subscribers in the second quarter. "I don't think these companies are being racked apart by competitive factors," Sine said. "Does that change when the new iPhone comes out? Probably for a little while."
The penalty for cutting a dividend could be steep. Landline telecom and broadband provider Windstream Holdings Inc. (WIN) plummeted 36% to $2.38 on Aug. 3 when it discontinued its dividend. Shares traded at $2.12 on Monday.
While AT&T's and Verizon's payouts may be secure, Moody's Investors Service analyst Mark Stodden said they could eventually face pressure. "The dividend for AT&T is safe for now, but if they cannot consistently grow Ebitda it will be threatened. Verizon is in the same boat," Stodden suggested. "Tax reform would delay the pain, not eliminate it."
Tax cuts from Washington would be a boon for the carriers, and make it easier to cover dividends and capex. AT&T CFO John Stephens discussed the outlook in an August investor conference. "Quite frankly, if you just think about tax reform, we're a company that has a 34% tax rate," he said. "Just simply think about what if it goes down from 35% to 25%."
With the track record of the Trump administration and this Congress, the debt markets are a more likely source of support than a tax overhaul for the near term.
Watch More with TheStreet:
- Jim Cramer Reveals What to Watch in TJX Companies and Home Depot Earnings
- President Trump Condemns Hate Groups, Days After Charlottesville Attack
- How EY's Kerrie MacPherson Uses Decades of Experience to Help a New Generation of Women Win
- 5 of Shonda Rhimes' Most Show-Stopping Moments on Grey's Anatomy
Editors' pick: Originally published Aug. 15.