For more than a century, telephone stocks have been the bread and butter of investors looking for a safe and reliable stream of income. This week, AT&T Inc. burnt the toast.
The company saw about $16 billion in market value evaporate after signaling it will cut its dividend as part of a deal to combine its media assets with those of Discovery Inc. The episode serves as a stark reminder to corporate America that, despite all the excitement around companies that boast high growth, dividends remain sacred to many investors who depend on the income.
For David Bahnsen, chief investment officer at Newport Beach, California-based Bahnsen Group, a cut in the payout is “the most unforgivable sin.”
“There are a lot of retirees out there that were counting on that dividend,” he said in an interview. “This is the very thing we exist to manage money for -- to avoid these dividend cuts.”
Even amid the tumult unleashed by the Covid-19 crisis last year, big U.S. companies proved less willing to cut back on dividends than they were to slash stock repurchases. Payouts from companies in the S&P 500 Index declined 13% from the first three months of 2020 to the following quarter, according to data compiled by Bloomberg. By contrast, stock repurchases tumbled by more than 50%.
In aggregate, dividends are almost back to where they were before the pandemic. For S&P 500 companies, they totaled $138 billion in the first three months of 2021, just 6% shy of pre-crisis levels. Buybacks, meanwhile, were more than 13% lower than they were in the first three months of 2020.
While companies are likely to earmark more excess cash to share repurchases in coming months, dividend payouts are on pace for a record in 2021, according to Howard Silverblatt, senior index analyst at Standard & Poor’s.
“We see an acceleration on this front as companies become more assured about the economy and their position,” he said. Raising them “is something you only do if you have assurance about your cash-flow situation.”
Pay Cut
For companies like AT&T, the ability to steadily raise dividends year after year is not only a sign of confidence in the business but also a means to attract income-oriented investors who will dump the shares at any sign that the expected payout is at risk.
While AT&T hasn’t officially cut its dividend, the company said its payout would be 40% to 43% of free cash flow, which is projected to be around $20 billion in 2022 when the deal is expected to close. That would be about $8.3 billion at the midpoint, compared with $15 billion paid out to shareholders in 2020.
Steady as She Goes
Unlike buybacks, dividend payouts remained relatively stable over the past year.
Bloomberg
One reason AT&T’s move was so jarring for some investors was its track record of raising dividends for decades. Dallas-based AT&T is one of 65 stocks in the S&P 500 known as a dividend aristocrat, a club of companies that have raised dividends annually for at least 25 years. An index of them has outperformed the S&P 500 by more than four percentage points so far this year, including dividends.
While no one likes a pay cut, AT&T’s projected dividend yield still won’t be anything to scoff at. At current valuations, the payout would yield about 4%, roughly in line with rival Verizon Communications Inc.
John Stankey, AT&T’s chief executive officer, sought to reinforce that fact in a defense of his company’s plan in an interview with Barron’s this week. He said the dividend would still be “incredibly attractive” and expects it to rank in the 95th percentile of yields. A spokesman for AT&T declined to comment.
Not everyone is up in arms about the move. Bill Stone, chief investment officer at Glenview Trust Co., said he wasn’t a fan of AT&T’s combination with WarnerMedia to begin with. He’s optimistic that the media assets will thrive in the new company, which AT&T shareholders will own a majority of, and said the transaction puts AT&T in a better position to invest in its broadband business and 5G infrastructure.
“I actually feel better about the stock than when we bought it,” he said.
— With assistance by Katrina Lewis, Tom Contiliano, and Ryan Vlastelica
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