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AT&T's High Yield May Be A Warning Sign

Published Wed, 25 Mar 2020 13:30:08 -0400 on Seeking Alpha

AT&T stock dividend yield is very attractive.
However, that yield may be a warning sign that investors see risk.
Options traders are betting shares fall further.
AT&T's (T) recent declines could only be the start of something more severe. The dividend yield for the stock has spiked to 7.2%, its highest yield ever. While that very high yield could be a place to hide during this uncertain period, it could also be a warning that investors are worried about the size of AT&T's balance sheet during this time of angst.
Options traders are betting that the stock falls further in the weeks ahead, dropping by an additional 8.5% from its price on March 25. The stock also fell below a critical level of support this week, and that indicates that shares may continue to remain under pressure in the weeks ahead.
Yield Spike
The dividend has spiked during the recent stock market sell-off and is now at its highest level versus the 10-year Treasury rate ever, reaching almost 6.5%. While it seems to be an extreme opportunity, it's worth taking a pause and wondering if that spread speaks to something more significant and if it suggests that the dividend may even be in jeopardy in future quarters.

Debt Load
The company does have a tremendous amount of debt as of the end of the fourth quarter of 2019 at almost $161 billion. Surprisingly, debt represents a high level of the company's total market cap, which is $206 billion. Additionally, the company paid out interest expenses of $8.4 billion in 2019.

More alarming is that the company paid out total dividends in 2019 of roughly $14.9 billion on net income of just $13.9 billion. It gives the stock a dividend payout ratio that is above 100%, and that could indicate dividend payments do not rise in the future, or even worse, perhaps fall.
With these high levels of debt and significant interest expenses, the dividend payout ratio could be the primary driver for that high dividend yield. Also,... Read more