|
|
|
ONLINE FEATURES
Book Reviews
BW Video
Columnists
Interactive Gallery
Newsletters
Past Covers
Philanthropy
Podcasts
Special Reports
BLOGS
Auto Beat
Bangalore Tigers
Blogspotting
Brand New Day
Byte of the Apple
Economics Unbound
Eye on Asia
Fine On Media
Green Biz
Hot Property
Investing Insights
Management IQ
NEXT: Innovation
NussbaumOnDesign
Tech Beat
Working Parents
TECHNOLOGY
J.D. Power Ratings
Product Reviews
Tech Stats
Wildstrom: Tech Maven
AUTOS
Home Page
Auto Reviews
Classic Cars
Car Care & Safety
Hybrids
INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads |  |
JULY 26, 2004
AT&T: A Buy Just For The Dividend? No stock today is hated more than AT&T (T ). Booted out of the Dow Jones industrials in April, AT&T now is recommended by none of the 26 Wall Street firms that rate it, according to Standard & Poor's (MHP ). Yet the clearest sign of how deeply AT&T is loathed is its dividend yield. Near $15, the stock is yielding a junkadelic 6.2%. Which could be a good thing. Good, that is, if you haven't owned the stock during its epic collapse, and good if you buy it now and the telecom titan is able to keep paying the current 95 cents-a-share annual payout. Will it? A spokesman told me AT&T's board has not indicated that the dividend is either in danger or sacrosanct. Yet worries abound. Under withering pressure on prices and regulatory setbacks, AT&T recently revised its 2004 outlook. Boy, is it bleak: 13% or so smaller revenue, from 2003's $34.5 billion, and a plunge in operating income, to maybe $1.2 billion from $3.9 billion last year before extraordinary charges. The gloomy forecast prompted S&P and Moody's Investors Service (MCO ) to begin studying whether to lower AT&T's credit rating, already just two notches above junk. DESPITE THESE SOBERING prospects, there is some reason to suspect that AT&T's dividend will survive. I say this not because I enjoy any special clue about the board's intentions. As Moody's Senior Vice-President Dennis Saputo said, AT&T's finance department surely is laboring over spreadsheets to work through each option, from maintaining the dividend to trimming or even ending it. Each is possible, and a move could come on July 22 when AT&T reports second-quarter results. Yet if you look past AT&T's income statement to its statement of cash flows, the dividend appears to be in less imminent danger. To see what I mean, let's examine two scenarios: a bad case, taken from management's current expectations, and something worse. The Bad. At last report, AT&T had nearly 794 million shares outstanding, so each quarter's 0.2375 cents-a-share dividend implies a total cash payment of $189 million to 2.7 million shareholders. In the first quarter, AT&T met that easily with free cash flow -- that is, cash flow from operations minus capital spending -- coming in at $803 million. The balance of the year promises to be tougher. On an estimated $30 billion in 2004 revenue, I guesstimate AT&T could collect $4.5 billion in operating cash flow. That's down plenty from last year's $8.5 billion. At the same time, though, AT&T has slashed its budget for capital spending, to $1.8 billion this year from nearly $3.2 billion in 2003. Even on its sharply diminished expectations, that means AT&T still can expect to have cash enough after capital projects to cover this year's dividend payments more than 3.5 times over. The Worse. What if, as many analysts have already concluded, revenue and cash flow fall only further in 2005? Given the horrific price competition AT&T is trying to face down, that seems a safe bet. So let's suppose revenue slides next year not by another 13% but by 20%, to $24 billion. Operations then might generate, say, $3.6 billion in cash. Subtract $2 billion of that for spending on capital projects, and AT&T still would have more than twice the cash needed to maintain the dividend. An unavoidable risk: If AT&T cuts capital spending too drastically, it could sabotage the quality of its telecom network and ultimately its appeal to the big businesses that demand more complicated -- and more profitable -- services. "It's clearly the premier network for the enterprise customer in the U.S.," said Moody's Saputo, who sees no evidence that less investment has dented service quality yet. A spokesman for AT&T says the company has invested far more than rivals over many years and so now can lower capital spending safely. Without an eventual end to price-cutting and a pickup in demand for its services, no amount of financial juggling will save AT&T's payout. Still, the company has time to turn things around. With the stock low enough to make for a 6.2% dividend yield, it's expressing more fear than reason.  By Robert Barker
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
