AT&T: Steady Dividend Option for Conservative Investors
AT&T's roots trace back to 1876 when founder Alexander Graham Bell invented the telephone. With a first-mover advantage in this disruptive technology, AT&T's fast-growing landline network gave it an effective monopoly over the U.S. phone system until the government forced the company to break up in 1984.
Since then, the communications world has evolved significantly. The rise of the internet and mobile devices ushered in the cellphone era, leading AT&T to respond with significant acquisitions and mergers throughout the 1990s and 2000s to become a leader in cellular wireless services.
The firm also became a major player in internet services and pay TV primarily through acquisitions, including its 2015 purchase of satellite TV provider DirecTV for $67 billion. AT&T even extended its tentacles into the media world in 2018 with its $85 billion acquisition of content powerhouse Time Warner.
By surrounding its core wireless services business with complementary internet and pay-TV offerings, AT&T hoped to strengthen and expand its relationship with customers.
But AT&T's sprawling operations became increasingly difficult to manage as the world changed. The rise of over-the-top streaming services caused DirecTV to lose millions of subscribers, and the heated streaming race demanded more investment in content to keep pace with global rivals such as Disney and Netflix.
Management in 2021 concluded that AT&T's different operations would benefit from having more focused oversight and decided to reverse the firm's prior strategy to create the largest vertically integrated content and distribution firm.
AT&T decided to spin off and combine its media business (around 20% of cash flow at the time) with rival Discovery to form a new company that will invest aggressively in content to try and win the global streaming race.
Lost cash flow from the media business, coupled with a need to reduce debt, forced AT&T to cut its dividend by 47% in 2022 – breaking AT&T's 35-plus-year dividend growth streak and costing the company its dividend aristocrat status.
However, AT&T's remaining operations look attractive, with wireless communications and internet services generating the bulk of profits.
These businesses enjoy high barriers to entry due to their capital intensity, and they generate predictable cash flow over an economic cycle thanks to the essential needs they serve.
Barring a significant technological change, it doesn't seem easy to uproot AT&T. It's much less complicated to maintain a large subscriber base in a mature market than to build a new base from scratch.
Overall, AT&T seems like a business that will remain relevant for many years, albeit with a slow but defensive growth profile.
With the company returning to its communication roots and no longer focused on empire-building, AT&T is hopefully positioned for a more conservative and predictable future with the potential to deliver stronger total returns.
Since then, the communications world has evolved significantly. The rise of the internet and mobile devices ushered in the cellphone era, leading AT&T to respond with significant acquisitions and mergers throughout the 1990s and 2000s to become a leader in cellular wireless services.
The firm also became a major player in internet services and pay TV primarily through acquisitions, including its 2015 purchase of satellite TV provider DirecTV for $67 billion. AT&T even extended its tentacles into the media world in 2018 with its $85 billion acquisition of content powerhouse Time Warner.
By surrounding its core wireless services business with complementary internet and pay-TV offerings, AT&T hoped to strengthen and expand its relationship with customers.
But AT&T's sprawling operations became increasingly difficult to manage as the world changed. The rise of over-the-top streaming services caused DirecTV to lose millions of subscribers, and the heated streaming race demanded more investment in content to keep pace with global rivals such as Disney and Netflix.
Management in 2021 concluded that AT&T's different operations would benefit from having more focused oversight and decided to reverse the firm's prior strategy to create the largest vertically integrated content and distribution firm.
AT&T decided to spin off and combine its media business (around 20% of cash flow at the time) with rival Discovery to form a new company that will invest aggressively in content to try and win the global streaming race.
Lost cash flow from the media business, coupled with a need to reduce debt, forced AT&T to cut its dividend by 47% in 2022 – breaking AT&T's 35-plus-year dividend growth streak and costing the company its dividend aristocrat status.
However, AT&T's remaining operations look attractive, with wireless communications and internet services generating the bulk of profits.
These businesses enjoy high barriers to entry due to their capital intensity, and they generate predictable cash flow over an economic cycle thanks to the essential needs they serve.
Barring a significant technological change, it doesn't seem easy to uproot AT&T. It's much less complicated to maintain a large subscriber base in a mature market than to build a new base from scratch.
Overall, AT&T seems like a business that will remain relevant for many years, albeit with a slow but defensive growth profile.
With the company returning to its communication roots and no longer focused on empire-building, AT&T is hopefully positioned for a more conservative and predictable future with the potential to deliver stronger total returns.
