Beyond the T-Mobile Charge... AT&T's Big Dividend Conundrum (T, VZ, S)

AT&T Inc. (NYSE: T) has been in the news because of what is turning into a more and more likely failed acquisition of T-Mobile from Deutsche Telekom.  While a $4 billion charge is a large sum of money, perhaps the real news is the fate over AT&T’s dividend.

The dividend question matters in the dividend horse race with Verizon Communications Inc. (NYSE: VZ), and it also lets the imagine run wild over whether or not Sprint Nextel Corporation (NYSE: S) can manage to wiggle into a position of a T-Mobile deal.

24/7 Wall St. recently reviewed all 30 DJIA components to see which companies were most likely to raise their dividends in the weeks and months ahead as we enter 2012.  The reality is that AT&T may now have a dividend conundrum.  The company has had four consecutive quarterly payouts at $0.43 and the telecom giant has a history of raising its dividend each year.

AT&T already noted on its own that the FCC action will create a pre-tax accounting charge of $4 billion, with $3 billion being a cash charge and $1 billion against the book value of spectrum.  The charge is also hitting all in this fourth quarter ahead of its dividend decision and the charge reflects the potential break-up fees due to Deutsche Telekom by AT&T if the transaction formally fails to receive regulatory approval.

Investors already know that AT&T has been a dividend star, now yielding about 6.2% based on the $27.60 share price.  The 52-week range is $27.20 to $31.94  and Thomson Reuters has a consensus price target of $31.90.  

Telecom rival Verizon Communications Inc. (NYSE: VZ) has already recently boosted its payout by more than 2% to $0.50 per quarter.  Its dividend yield, based on a $35.60 share price, generates more than 5.6% and that leaves AT&T way ahead of Verizon for yield investors.  Verizon’s 2012 Thomson Reuters estimate of $2.55 EPS puts the implied payout ratio at about 78%. 

Is there any way that Sprint Nextel Corporation (NYSE: S) could somehow manage to sneak in the back door with a T-Mobile deal of its own?  On the surface, no way.  Sprint’s market cap is only $7.3 billion.  Its enterprise value including debt is exponentially larger.  So a traditional form of M&A is not at all possible here.  Dan Hesse would actually have to make Sprint a much smaller owner of a combined NewCo.  Investors may balk as well, particularly with Sprint’s share price performance and operating losses.

If AT&T is or is not going to make any dividend changes it will likely be announced in December as it has been announced then in the past.  2010’s December news announcement for the higher payout in February was actually the 27th year in a row of higher dividends from A&T.  The 2012 Thomson Reuters consensus of $2.49 EPS is before the impact of any charges and that puts the current expected payout ratio at about 69% of next year’s expected earnings.

Our take is that AT&T will still raise its dividend by a penny or so per quarter.  The decision may actually be a coin toss as paying out more and more in the wake of a pending charge might look like too much leverage if you include a $3 billion or $4 billion charge.  Still, there is plenty of room to juice that payout further. 

JON C. OGG