Dialing for Dividends

The American Funds have a penchant for dividends. Some funds, such as  Washington Mutual Investors (AWSHX), are more focused on dividends and deriving income from stocks than others, but, on the whole, American's managers, or counselors (as the firm calls them), like stocks that pay investors some income.

Wednesday, one of American's large dividend-paying holdings,  AT&T (T), announced earnings for the first quarter of 2009. We'll review the announcement and what it means for American's positions in the stock.

First, AT&T's earnings per share fell to $0.53 from $0.57 from the first quarter of 2008, a decline of 7%. Total revenues fell slightly to $30.6 billion from $30.7 billion, including an increase in revenue from data (Internet service) to $6.3 billion from $6 billion and an increase from wireless to $11.6 billion from $10.6 billion. Overall, the slowing economy doesn't seem to have hurt the firm's sales very much. The push to bring data and video into homes and the popularity of  Apple's (AAPL) iPhone, which uses AT&T wireless service, are also clearly helping the firm. Indeed, the firm reported more than 1.6 million Apple iPhone 3G activations. Additionally, overall users of 3G wireless devices increased to 41% from 20%.

Moving to the balance sheet, we see that AT&T has $264 billion of assets against $167 billion in liabilities. The liabilities include $64 billion in long-term debt, which is up from $61 billion at the end of 2008, and $32 billion in postemployment benefit obligations. The firm can cover its interest payment ($849 million) by nearly 7 times with operating income, which is generally considered a very healthy margin, but its retirement obligations and deferred tax liabilities aren't insignificant.

AT&T's dividend appears safe for now. The firm generated $7.9 billion in cash flow from operations and spent $3.1 billion on long-term expenditures. The remaining $4.8 billion was enough to cover the $2.4 billion dividend payment.

Finally, Morningstar equity analyst Michael Hodel has awarded AT&T a narrow moat for the firm's scale, customer relationships, and network reach, and estimates the firm's fair value at $32 per share, which is 23% above its current $26 price. Because of increased competition from cable rivals, Hodel's discounted cash-flow model assumes lower revenues from fixed-line services and also lower margins overall than those the firm enjoyed in 2008. Hodel has also considered the drop in value of assets held to fund AT&T's post-retirement obligations.

Some of American's largest funds have significant positions in AT&T.  Washington Mutual Investors (AWSHX) has 4.8% of its assets in the stock, while  Investment Company of America (AIVSX) has 3.2% of its portfolio in the stock. Among the moderate-allocation and global-allocation funds, the  Income Fund of America (AMECX) has 2.8% of its assets in the stock,  American Balanced (ABALX) 1.8%, and  Capital Income Builder (CAIBX) 1.8%. The stock is one of the top-five holdings of all these funds. All of these funds, with the exception of Investment Company of America, are also Morningstar Analyst Picks.

American's Stake in AT&T
Fund	% of assets in AT&T
Washington Mutual Investors (AWSHX)	4.8%
Investment Company of America (AIVSX)	3.2%
Income Fund of America (AMECX)	2.8%
American Balanced (ABALX)	1.8%
Capital Income Builder (CAIBX)	1.8%
American Funds' Total AT&T Ownership
Capital World Investors	3.2%
Capital Research Global Investors	2.7%

From an organizationwide perspective, American's two main investment units, Capital World Investors and Capital Research Global Investors, own 3.2% and 2.7%, respectively, or nearly 6% of AT&T's outstanding stock. American has apparently made a bet on continued steady revenue from the firm's wireline business and some growth from the data and wireless businesses, all the while getting paid with a hefty 6% dividend yield (based on the current $26 share price). Despite the giant telecom's stock price slightly underperforming the S&P 500 Index so far this year through April 21 (negative 7% for the stock versus negative 6% for the index), it appears from the earnings report that the bet is mostly panning out.

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