Market Overview

Should Investors be Concerned about Falling Dividend Rates at AT & T

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In the telecommunications sector, AT&T’s reputation is well known. In fact its stocks are seen as stable investments that can be depended upon. But this scenario is set to undergo changes in the near future. There are many reasons for this change of status in the company’s profits. Analysts cite many reasons for the fall in the dividend rates of which a select few are detailed here.

Sustainability of Dividends

Though the payout ratio of AT&T has been high and at one point was 249%, it has decreased to 66% in 2014, but it is still considered high. The first quarter earnings as disclosed on July 23, when market closed have been dismal. The drop in revenue (to $32.57) and share value to 62 cents had the stock value dropped to 1.06% and has been declining steadily that was at 2.14% on August 8.

The increase in revenue in wireless division by 4% is however a redeeming feature as the sector makes up nearly 55% of the company’s revenues. The decline of 27% in other sectors is not that important as they account for only negligible revenue. The previous quarter revenue of AT&Twas higher at 92%.

The positive growth of a company is determined by the payout ratio or the dividend money it gives to its investors.  The payout ratio reflects on the high revenue generated by a company. A higher ratio may be paid out to show investors that the company is doing well, though in reality it is not.

When the ratio increases over 100%, it is not sustainable and the company is in effect utilizing the reserve revenue to give out the dividends. So even if the dividends have been declared, the company is not in a position to afford it. This shows the low sustainability of dividends and is set to decrease further in future.

Operational Changes

The efforts made by AT&T to modify its services as prepaid service via its Cricket brand is a move that is designed to help it pass through the rough phase it undergoes at present. The capital needed for this move will certainly reduce the dividend amount, as liquidity or any raise in interest rates is seen as an impact of its capital demands. This is certainly an issue to be concerned about by the investors.

Change in Plans

The shift from monthly payments to installment plans offered by the company to its customers is another issue of concern. The money needed to purchase phones for the customers is to be paid by the company upfront. Profitability will take a nose dive, if the customer retains the phone for a longer period. The loss in balance of the amount invested and income generated can affect the dividends markedly. 

Though the company has so far given profits for its investors, the dividends cannot be sustained in the long term, mainly because of the cash flow difficulties the company faces. If the issues outlined above are not taken care of, the situation may decline further and investors may be seen opting out of the whole process.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

 

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