Riding on the expectations of being the first company to launch the 5G mobile service, AT&T recently reassured its shareholders and prospective investors that 2018 would be an optimistic year against the backdrop of the Time Warner merger deal.
In its recent Q4 2017 earnings release, AT&T posted revenues of $41.7bn which was a bit lower than the year-ago revenue of $41.8bn. However, the revenue bested the Wall Street estimates of 41.19bn. Complimenting this, the EPS was too at 78 cents per share compared to estimates of 65 cents.
The Chairman and CEO, Mr. R. Stephenson said that the recent Republican tax reform has a positive impact on the organization. With effective tax rate getting reduced from a hefty 32.7% to 21%, it will likely result in additional savings of $3bn in cash. As a mega-cap company that pays a hefty pre-tax, this reform will help in saving more money for future growth prospects.
The tax reform also contributed to 13 cents in the EPS. The cash flow that was freed up helped in additional investments in growth and dividend payout ratio which was 68% in 2017. The additional cash flow came in as a bonus for more than 200,000 employees and a voluntary medical plan contribution.
The thing to watch out for is the current debt to EBITDA which is 2.19 times and will increase to 3 times if the merger deal goes through. AT&T will make use of its free cash flow to offset this problem.
The AT&T stock has dropped by 5% in 2017 with intermittent highs and lows or to say, teacup phases between $31 and $40 during September and November. This volatility was due to the unexpected postponement of the highly anticipated merger with Times Warner.
However, a conglomerate like AT&T with $200bn market cap can weather the fall and rise of 5% in its stock price. The AT&T stock will gain momentum once regulatory approval is granted for the merger. For a long-term investor, the stock is very well suited for investment considering the dividend history.
AT&T is rightly called as the “Dividend Aristocrat” as it has raised its dividend for 34 consecutive years. On 15th December, the board approved a dividend hike of 2%, from $0.49 to $0.50. The annualized increase will be from $1.96 to $2.00 per share. This represents a yield of 5.26%.
The dividend history of AT&T is proof that even of high yield can be viewed with caution by some investors; all in all, its dividend is a reliable one given the fact that it also kept its dividend steady during the dotcom bubble. Looking at the past experience, investors can reasonably conclude that their AT&T stock is a safe investment.
Why can we look forward to a positive 2018?
- Company expects to complete the merger deal which will boost business and stocks
- Repeal of net neutrality will ease the cut-throat pricing environment
- Republican tax reform will free up more cash for further investment
- Launch of 5G mobile services will increase the subscriber base