Could AT&T Stock Survive A Market Crash?

T Chart

AT&T has long been known as a conservative income stock which has survived previous market downturns while consistently boosting its dividend. Yet big market crashes can cause even the most experienced investors to lose sight of the fundamentals and sell in a panic. Therefore, as the market hovers near historic highs, let's take a moment to see how well AT&T can hold up if the market crashes.

How AT&T fared during the financial crisis

First and foremost, we should study AT&T's performance during the financial meltdown of 2008-2009.

Source: Ycharts.

AT&T's revenue and net income rose substantially through 2008-2010 thanks to its exclusive hold on Apple 's iPhone, which lasted from 2007 to 2011. But the expiration of that deal in early 2011 -- along with big charges for pension plan adjustments, a $3 billion breakup fee from a failed attempt to buy T-Mobile USA, and a writedown on its phone-directory business -- caused its annual EPS to plunge 81% between 2010 and 2011.

AT&T eventually recovered by diversifying its smartphone lineup with Android devices, raising data prices, and leasing/selling 9,700 cell towers to Crown Castle for $4.85 billion in 2013. But despite that fundamental recovery, AT&T's stock price still hasn't reclaimed its pre-meltdown high of $42 per share in Dec. 2007.

Fundamental weaknesses

AT&T's main industry rival is Verizon . Both companies each control 34% of the U.S. wireless carrier market in a duopoly, according to Chetan Sharma Consulting. Over the past year, AT&T has slashed prices and raised data caps to compete against Verizon. Unfortunately, that strategy hasn't worked out as well as AT&T planned:

New postpaid subscribers Q1 2014 Q2 2014 Q3 2014
AT&T 625,000 1 million 785,000
Verizon 549,000 1.4 million 1.52 million

Source: Quarterly reports.

AT&T's price cuts didn't accomplish anything except reduce revenue and raise data expenses per user. That's why AT&T's revenue only rose 2.5% year-over-year in the third quarter, while its diluted EPS fell 19%. To make matters worse, a recent FTC complaint alleges that AT&T misled "millions" of smartphone customers by billing customers with "unlimited" data plans while throttling their speeds by as much as 90%, which could be a boon to Verizon.

Earlier this year, AT&T agreed to buy DirecTV , the second largest paid TV provider in the country, for $48.5 billion. This would expand its U-Verse (its broadband Internet, phone, and TV bundle) to include satellite TV. With 26 million combined pay TV subscribers, AT&T could also gain more leverage in negotiations with content providers.

Together, the two companies have a combined trailing 12-month free cash flow of $14.2 billion and combined long-term debt of $94 billion. AT&T paid $9.7 billion in dividends to shareholders over the past year -- currently enough to be covered by its trailing FCF -- but if it realizes that the acquisition and integration of DirecTV is more costly than expected during a market downturn, could AT&T reduce its dividend?

How crash-proof is AT&T's dividend?

AT&T has raised its dividends through thick and thin for 28 consecutive years, so I doubt that it will reduce its dividend to free up cash flow. Notice that when things got rough in 2011 and 2012, AT&T preferred to boost its payout ratio past 100% rather than slash its dividend:

2007 2008 2009 2010 2011 2012 2013
EPS $1.94 $2.16 $2.05 $3.35 $0.66 $1.25 $3.39
Dividend $1.465 $1.61 $1.65 $1.69 $1.73 $1.77 $1.81
Payout ratio 76% 75% 80% 50% 262% 142% 53%

Source: NASDAQ.

Therefore, AT&T's dividend is probably the last thing investors should worry about, and its hefty forward annual yield of 5.3% remains one of the stock's most appealing qualities.

The takeaway

In the event of a market crash, investors should remember that they own AT&T for its dividend and not its price appreciation. If its stock price declines while its dividend remains the same, it could rope in new investors with a higher yield, which will help the stock eventually bounce back. Therefore, I believe that AT&T stock will easily survive a market crash, and a market downturn could actually be a buying, rather than selling, opportunity for long-term income investors.

Top dividend stocks for the next decade

The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here .

The article Could AT&T Stock Survive A Market Crash? originally appeared on

Leo Sun owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More