Snap quiz: How big is the total debt of telecommunications giant AT&T (NYSE: T)?

Answer: $179.1 billion. For perspective, that amount approximates the total national debt of Argentina. Let that sink in a minute.

How did AT&T incur such massive debt? And more to the point, does the company’s overburdened balance sheet pose a threat to the stock’s dividend?

For years, telecom AT&T has been a reliable growth-and-income generator. The stock remains a staple in retirement portfolios — the sort of blue-chip your parents gave you on college graduation day.

AT&T is a “Dividend Aristocrat,” a member of the S&P 500 that has boosted its dividend annually for more than 25 years.

But then a funny thing happened: the digital revolution in media and communications. AT&T lost its footing and still hasn’t regained it. Let’s see if AT&T’s dividend is poised for growth, stagnation or even worse a cut.

Does AT&T Pay Dividends?

Yes. The stock has demonstrated dividend growth for 34 years.

What Is AT&T’s Dividend?

AT&T pays a quarterly dividend of $0.51.

What’s AT&T’s Dividend History?

• In 2018, the stock paid a dividend of $0.50 on 02-01, 05-01, 08-01, and 11-01.
• In 2019, the stock paid a dividend of $0.51 on 02-01.

The following chart, compiled with data from AT&T, provides more details:

What’s AT&T’s Dividend Yield?

The stock’s dividend yield is a robust 6.80%. The current average dividend yield for the S&P 500 is 1.93%.

A stock’s dividend yield is calculated by taking the yearly dividend payment and dividing it by the stock price. For example, if the stock throws off $1 in dividends annually, and the share price is $50, the dividend yield is 2%.

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When Is AT&T’s Dividend Payout Date(s)?

The annualized payout is $2.04. Forthcoming payout dates in 2019 are 05-01, 08-01, and 11-01.

Will AT&T’s Dividend Increase In 2019?

It’s doubtful that the company can boost its dividend, while simultaneously reducing its debt and investing in future growth. Competition is brutal, which compelled AT&T to go on an expensive acquisition spree and aggressively re-position into multi-media.

Based in Dallas, AT&T boasts many strengths and yet remains unloved by Wall Street. As the company tries to recover its mojo, the stock has been a consistent underperformer.

With a market cap of $217.4 billion, AT&T operates through four segments: Business Solutions, Entertainment Group, Consumer Mobility, and International.

The Business Solutions segment offers wireless services, legacy voice, wireless equipment, and other services. The Entertainment Group provides video entertainment and audio programming channels to approximately 25 million subscribers, as well as broadband and Internet services to 13.5 million residential subscribers.

Consumer Mobility offers postpaid and prepaid wireless voice and data communications services. The International segment offers digital television services under the DirecTV and Sky brands throughout Latin America. This segment also offers wireless services in Mexico to 15 million subscribers under the AT&T and Unefon brands.

This sprawling telecom/media conglomerate shares many of the same woes as General Electric (NYSE: GE). As with GE, AT&T is a famous name that was blindsided by disruptive technology, which in turn led to strategic errors.

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To be sure, AT&T’s payout ratio is 58%, which is generally healthy.

The payout ratio reflects how much of a company’s net income is devoted to dividend payments. For example, if the company in a quarter generated earnings per share of $1.00 and paid a dividend of 60 cents per share, the payout ratio would equal 60%.

However, AT&T faces headwinds that endanger the dividend. Competitors such as Verizon (NYSE: VZ) are proving nimbler and have a jump on new technology investments, such as ultra-fast 5G. Verizon launched 5G Home, the world’s first 5G network, on October 1, 2018, in parts of Houston, Sacramento, Los Angeles and Indianapolis. Rolling out a 5G network is expensive.

Meanwhile, Netflix (NSDQ: NFLX) and Amazon (NSDQ: AMZN) are plowing huge sums into creating original, quality content. It’s the original content that wins awards and new customers; the Silicon Valley titans have sufficient cash to fund it.

This dynamic diminishes the value of the pre-existing Time Warner content for which AT&T probably overpaid. The merger also left AT&T with a lot of debt, which amounts to the highest of any non-financial corporation.

Will AT&T’s Dividend Be Cut In 2019?

Probably not, but one thing is for sure: the stock price has languished. In 2017, AT&T shares lost 5.9% whereas the S&P 500 gained 19.4%. In 2018, AT&T shares lost 24.2% whereas the S&P 500 lost 7.5%.

The U.S. government broke up AT&T in the 1980s, forcing it to spin off the so-called Baby Bells. The Baby Bells owned the local phone side of the business while AT&T was left with long distance operations.

For the time, it was a rare example of rigorous anti-trust action. But ironically, as this video explains, the move only served to make AT&T bigger.

AT&T’s cellphone business remains valuable but growth prospects are limited as the market gets crowded. Investing in new technology and infrastructure, such as the transition to 5G service, is capital intensive and pressures profit margins.

Historically, telecommunications stocks were viewed by investors as low-beta blue chips. They lacked volatility and drama and conferred steady growth and income.

Those days are gone and AT&T knows it.

Hence AT&T’s purchase of DirecTV in 2015 in a deal worth $48.5 billion. The merger made sense, at the time. DirecTV owns a satellite system that connects people with content. Problem is, “disruptors” such as Netflix and Amazon now provide streaming content, undermining demand for DirecTV. Delivery systems are becoming commoditized, which makes content king.

Which brings me to AT&T’s purchase of Time Warner. The digital revolution hasn’t been kind to Time Warner either, but it possesses some of the most valuable media content on the planet.

The court victory in June 2018 of AT&T’s bid to acquire Time Warner and its rich library of content was an ostensible boon for the telecom. But now, the acquired Time Warner content looks rather stale and horribly expensive.

AT&T continues to restructure the company, to reduce debt.

On February 13, AT&T announced that it planned a bond sale to refinance its debt load, most of which it incurred from its misguided purchases of DirecTV and Time Warner. These expensive deals are delivering diminishing returns.

Reports surfaced March 4 that AT&T would break up Atlanta-based Turner Broadcasting and funnel the pieces to various other internal entities. Layoffs and other cost-saving measures at Turner will ensue.

It’s encouraging that AT&T has raised its dividend for 34 consecutive years and earned a spot on the 2018 list of Dividend Aristocrats. The stock’s dividend is currently among the highest in the S&P 500.

Although its media properties are troubled, the company’s wireless division is a reliable generator of free cash flow. This free cash flow has been steadily growing, so the dividend appears safe… for now. But it will be years before AT&T gets a handle on its debt, if ever.

My verdict: Conservative income investors shouldn’t bet on a struggling company whose debt equals that of a major country. You can find safer sources of dividend income. AT&T may turn out to be a pauper in “aristocratic” clothing.

John Persinos is the managing editor of Investing Daily.