By now, you’ve seen the news: AT&T (T) is buying pay TV rival DirecTV (DTV) for a whopping $48.5 billion in cash and stock in one of the biggest mergers in years. Including the assumption of debt, the deal comes to $67.1 billion. Whether or not this is a good move for AT&T shareholders is debatable. AT&T is buying a mature business with limited growth potential domestically. The cash portion of the deal – $14.5 billion – will need to be largely financed by debt, as AT&T only has about $3.8 billion in cash on hand.
DirecTV is a bad buy for AT&T. But most investors that buy AT&T stock aren’t buying it for growth; they buy it for its rock-solid dividend. The good news is that I don’t see this merger having an impact on dividends for AT&T stock. Despite the high yield of 5%, T stock’s payout ratio is only 53%. And while AT&T will probably increase its debt burden by more than 50% once the deal is finalized, the increased leverage will not be enough to put AT&T at any real risk. Bottom line: The DirecTV purchase is a questionable business move, but it won’t have any adverse effect on AT&T’s dividend.
Source: InvestorPlace
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