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AmextaFinance > Investing > AT&T, Verizon Stock Dividends: What Amazon Wireless Would Mean
Investing

AT&T, Verizon Stock Dividends: What Amazon Wireless Would Mean

News Room
Last updated: 2023/06/07 at 3:55 PM
By News Room
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Just the thought of
Amazon.com
entering the wireless telecom business—as Bloomberg reported on June 2—was enough to send shares of
Verizon
Communications and
AT&T
tumbling. It also sent their dividend yields to mouthwatering levels. Their yields are about as attractive as they have ever been—so long as those dividends are safe.

Well, are they? Wolfe Research’s chief investment strategist, Chris Senyek, has a three-pronged test for finding dividends that are too good to be true. First, a company that pays out 80% or more of its net income may have too much going to support the payouts. Second, he applies the same test to free cash flow. Third, companies with a ratio of debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda, north of 3.5 times could be problematic as well.

If two of those three criteria are met, Senyek worries about cuts.

For most companies in the
S&P 500,
that isn’t an issue. The average dividend payout relative to free cash flow is about 40%, while the average payout relative to net income is about 45%. The average debt-to-Ebitda ratio—excluding financials, which have very different balance sheets and earnings metrics—is less than two times.

And it shouldn’t be a problem for Verizon (ticker: VZ) or AT&T (T), even though the wireless carriers have a lot of debt. AT&T’s net debt to estimated 2023 Ebitda is about three times, while dividends being paid out amount to roughly 50% of both 2023 estimated free cash flow and net income. Verizon’s debt-to-Ebitda ratio is about the same as AT&T’s, while dividends account for about 65% of estimated 2023 free cash flow and about 55% of estimated net income. Those metrics are a little higher than AT&T’s, but aren’t in the danger zone.

What’s more, both management teams have recently acknowledged the importance of dividends to their investors—at least before the potential for Amazon Wireless cropped up. The idea of Amazon as disrupter is nothing new. The company always seems to be the one that gets dropped into conversations about existential threats to incumbents. Amazon (AMZN) leasing planes? That spells the end of
FedEx
(FDX). A redesigned Amazon business website? That spells the end of industrial distribution company
W.W. Grainger
(GWW). An Amazon pharmacy benefit manager? Down goes
CVS Health
(CVS).

The reason investors put Amazon into these discussions is easy to understand. The company is huge, with a $1.3 trillion market capitalization, about five times the combined cap of AT&T and Verizon. What’s more, Amazon doesn’t seem to mind low profit margins in exchange for growth—and neither does the market.

The idea of a new competitor accepting lower margins sounds a little concerning, but it probably isn’t going to happen. “Where do we start?” asked Moffett Nathanson analyst Craig Moffett in a Friday report. There are regulatory hurdles, and Amazon would need to license an existing network. The economics of a licensing deal look terrible for both Amazon and a wireless partner, he writes, adding, “letting the fox into the hen house would be an awful idea.” Similar sentiments were expressed by Goldman Sachs, UBS, and Wolfe Research. An Amazon spokesman also told Barron’s that the company has no plans to add wireless service right now.

While the risk of anything material happening looks small, an Amazon overhang could remain for shares of AT&T and Verizon. That should be just fine for yield-hungry investors. The Amazon Wireless report sent Verizon’s dividend yield to the highest level in some 40 years and both stocks now yield more than 7%, based on annualizing current quarterly payouts.

Not every business is made for disruption. Now dividend-focused investors can get paid to wait for everyone else to realize that.

Write to Al Root at allen.root@dowjones.com

Read the full article here

News Room June 7, 2023 June 7, 2023
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