We previously published an article analyzing AT&T’s (T) recent financial performance. We are aware of how the telecom industry’s legacy wireline business is in a mature and declining industry phase, and we are starting to see signs of maturity from the wireless communications segment as well. Signs of maturity we are seeing from the wireless communications segment include decelerating revenue growth, reduced numbers of new subscribers, and year-over-year reductions in capital expenditures. While this may not be the kind of news that growth investors who are primarily seeking capital appreciation want to hear, this is great news for income-oriented investors. That’s because we expect such trends to prompt companies to increase the proportion of free cash flows returned to investors in the form of dividends and share repurchases.
We saw this with AT&T this year as it has made $4.25 billion worth of net share repurchases in the first six months of 2012, whereas last year it was saving its cash in order to help finance the proposed $39 billion cash acquisition of T-Mobile USA from Deutsch Telekom. We then followed up our first article with our evaluation as to why AT&T and other telecom companies are reliable dividend payers. In this article, we will provide further detail on AT&T’s wherewithal to pay dividends.
AT&T’s Dividends and Its Debt Position
With $64.5 billion in outstanding debt as of Q2 2012, AT&T is most certainly not debt-free. However, we are more than aware of the fact that AT&T is a large, industry leading blue-chip telecom services firm and is certainly able to access the capital markets for whatever debt or equity it requires. AT&T paid $1.8 billion in interest expenses in the first half of 2012 on its $64.5 billion in outstanding debt for a weighted average cost of 5.58%. While AT&T may not be confused with a growth engine, we believe that the free cash flows generated by AT&T can be utilized at a rate of return well in excess of the 5.58% pre-tax (3.35% post-tax) cost of debt financing that AT&T utilizes.
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