Let Your Dividends Pay Your Phone Bills

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Let Your Dividends Pay Your Phone Bills

I recently stumbled upon the 1923 annual report for AT&T, or the old Ma Bell. It was provided by Brian Nelson from Valuentum. AT&T owned the telephone monopoly in the US until 1983, when it was broken up.

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Q3 2020 hedge fund letters, conferences and more

The 1923 annual report introduced a novel idea - "Let Your Dividends Pay Your Phone Bills". The idea was for customers to acquire stock in AT&T, which paid generous dividends, and use those dividends to pay their phone bills. This is a fascinating idea, and it looks like something a dividend growth investor would say today. In fact, we've had a few posts that shared this idea in more detail - Paying Your Phone Bill with AT&T Dividend Income.

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AT&T Stock On An Installment Plan

It also seemed like investors could buy AT&T stock on an installment plan, and pay a 6% annualized interest rate in the process. Given that the yield was higher than the interest rate, the investor probably came out ahead. It also looks like dividends were not taxable under the current Federal Tax laws at the time.

Ultimately, the only large pieces left are AT&T (T) and Verizon (VZ). The current AT&T is actually one of the spin-offs from 1983, whose name was originally SBC. In a strange twist of events, the SBC acquired the old AT&T in 2005, and took over its name.

That new AT&T had managed to increase dividends every single year since its spin-off in 1983. Unfortunately, last week management decided to keep dividends unchanged at 52 cents/share.

The Danger Of A Dividend Freeze

The company stated the following in its press release (source):

The company expects to have the financial flexibility in 2021 to continue to invest in growth areas, sustain the dividend at current levels and focus on debt reduction.

It seems to me that they won't be raising the dividend for the foreseeable future. This means that the dividend streak is in danger if they fail to raise the dividend by the end of 2021. Of course, the real danger is that a dividend freeze could be the first step before a dividend cut. Just for reference, AT&T has a 36 year streak of annual dividend increases, and is a member of the dividend aristocrats and dividend champions. Verizon on the other hand has a 14 year streak of annual dividend increases, the last one being in September 2020.

It seems that the acquisitions of DirecTV and Time Warner did not work out as expected, as the value of these assets has declined. The debt associated with these acquisitions is still there however, and it needs to be repaid. It looks like this is the priority for management right now. I am of course being too generous about these two acquisitions. They essentially lit tens of billions of dollars in shareholder wealth on fire.

What is your opinion on AT&T today? Are you buying more, holding, or planning to sell - please share your input in the comments below.

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