AT&T’s Extraordinary 6.3% Yield

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There are junk bond funds that have a yield of less than 7%. They are comprised of bonds in companies that are below investment grade, which means they carry considerable risk. However, one mammoth U.S. company, which has been in business for decades, has a yield of 6.27%, the highest of any mega-cap stock traded on the U.S. markets. In a period of low interest rates, nothing compares to its potential attractiveness.

AT&T Inc.’s (NYSE: T) $2.04 dividend is what creates the yield. It is rare for stocks to have high payouts unless their share prices are troubled. AT&T trades above $32, not far from its 52-week high of $34.30. The argument against AT&T’s robust share price, up 14% this year (about the same as the Dow Jones industrial average), is that the company took on a mountain of debt to buy Time Warner. It paid $85.4 billion for the media company. Management’s argument was that media, particularly digital media, is a rapidly growing business, particularly against AT&T’s traditional wireless and landline operations.

The deal, AT&T says, will allow it to bundle media for its wireless and home broadband customers. In theory, this puts it in the same sector where Netflix, Disney and Amazon compete. However, none of these has 153 million wireless subscribers to which it can offer its service. AT&T’s direct competitors do not have that customer conduit. It also has millions of subscribers to its U-verse home broadband plan, and millions more to its DirecTV, for which it paid $48.5 billion.

Optimists believe that the AT&T program bundles will not only create a large, new subscriber pool. They also will make it more likely AT&T can keep current subscribers to its services and pick up new ones. Customers can get these broadband services along with premium media. That theory is a long way from being proved.

Debt on its balance sheet aside, AT&T did make $20 billion in net income last year on $171 billion in revenue. While the debt is a considerable drag on AT&T’s financial prospects, it would need to have a sharp drop in its financial fortunes to cut its dividend, and thus its 6.3% yield.

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