Dividend Aristocrats Part 51: AT&T Inc. (T)

It should not surprise anyone that AT&T is one of the biggest spenders on lobbying. The company’s lobbying spend per year is shown in the image below:

Source: Open Secrets

The unique economics of the wireless industry reduce competition and allow AT&T to charge a premium price for its services.

The company’s competitive advantage rests on its multi-billion dollar network it has built over the years combined with government restrictions.

The company will likely maintain its strong competitive advantage and compete with Verizon for the top spot in wireless data for the foreseeable future.

AT&T’s Expected Total Returns

AT&T Inc. (NYSE:T) has a dividend payout ratio of approximately 70% of fiscal 2015 earnings. The company pays the bulk of its income out as dividends.

With a 5.4% dividend yield, AT&T does not need to deliver rapid earnings-per-share growth to give shareholders double digit returns.

AT&T’s management is expecting long-term earnings-per-share growth of around 4% to 6% a year.

The company’s compound earnings-per-share growth rate over the last decade is just 2.0%. From 2001 through 2012, AT&T’s earnings-per-share were virtually flat.

AT&T’s growth plans revolve around recent acquisitions of DirecTV (NASDAQ:DTV), Lusacell (a Mexican wireless provider), and Nextel Mexico.

Source: AT&T 2015 Analyst Presentation, slides 39 and 42

The DirecTV acquisition is beneficial to AT&T in 3 ways:

1. Gives the company access to the South American market

2. Gives AT&T better cross-selling opportunities

3. Expands digital content distribution

AT&T is focusing heavily on the Mexican market. AT&T announced it would invest $3 billion to extend its high-speed mobile internet to 100 million Mexican consumers by 2018. Customers on AT&T Mexico plans will be able to make calls on their Mexican plan while in the United States to others on AT&T plans.

This ‘2 countries, 1 plan’ approach should have wide appeal in Mexico and help AT&T gain market share in the country.

AT&T’s recent large acquisitions also create significant synergy/cost-reduction opportunities.

With enhanced growth prospects from recent acquisitions combined with cost-cutting measures over the next several years, I believe AT&T’s management’s earnings-per-share growth target of 4% to 6% a year is reasonable.

This growth combined with the company’s current 5.4% dividend yield gives investors expected total returns of 9.4% to 11.4% a year from AT&T.