LUMN - AT&T: Dreaded Dividend Cut Appears Inevitable

2023-07-28 09:00:00 ET

Summary

• I have been one of, if not, the biggest bull regarding AT&T on Seeking Alpha. I have owned the stock on and off for decades.
• Nevertheless, when the story changes (as it very much has), I take action.
• At this juncture, I don't just see a dividend cut coming, but the entire elimination of the payout.
• In the following piece, I make my case.

Dividend Cut Squarely On The Table

I recently took profits and sold out of the remainder of my AT&T ( T ) position after the news of the "lead-covered telecom cables" issue came to light. I held it in one of my dividend income generation portfolios. I believe this will be the proverbial "straw" that breaks AT&T's Dividend Camel's back, so to speak. The overarching issue is this isn't the only problem AT&T has at the moment. Furthermore, this just might be the excuse management needs to pull the trigger and completely eliminate the dividend if things take a turn for the worse (which they obviously will).

The lead-covered telecom cables issue

I have seen this movie before. AT&T has a gauntlet of bad news and potential liabilities heading its way. Furthermore, the colossal cable calamity is just getting started. As reported by Seeking Alpha :

"The U.S. Justice Department and the Environmental Protection Agency are probing possible health and environmental issues from lead-covered telecom cables.

The EPA's enforcement office has directed AT&T and Verizon Communications (NYSE: VZ ) to provide inspections, investigations, and environmental sampling data, about their lead cables within 10 days, according to a WSJ report late Wednesday, which cited a person familiar with the matter.

The DOJ's civil inquiry, from the U.S. attorney's office for the Southern District of New York, is in its early stages and is probing whether the telecom companies knew of potential risks to their workers and the environment from the lead cables, the WSJ said.

The investigations come in the wake of a WSJ report from earlier this month that said telecom operators still had lead-clad cables in their networks. According to the WSJ , AT&T faces the biggest risk with the most cable in the ground, followed by Verizon. Verizon has said the percentage of lead-sheathed cables in its existing network is small.

AT&T ( T ) ticked down almost 1% in after hours trading. Verizon ticked lower by 0.3%.

It was disclosed last Wednesday that AT&T ( T ) halted its plan to remove lead cables in the Lake Tahoe area and will test lead levels at locations where it has lead sheathed cables, according to a court filing."

Currently, the amount of lead cables AT&T actually has, whether they knew they were an issue, whether they are even an issue, whether they can be safely remediated, or whether it's best to just leave them be, is completely unknown. Finally, whether the current company is even liable due to the many changes in AT&T over the years. Even worse, don't expect the politicians to just let this opportunity pass them by either. As Winston Churchill famously said when working to form the United Nations after WWII, “ Never let a good crisis go to waste ." Let me explain.

Never let a good crisis go to waste

The one thing you can be certain of... is this issue is not going away anytime soon. What's more, the local and federal politicians in the House and the Senate are going to have a field day with this mess and go after AT&T relentlessly. There will be never-ending hearings and investigations. These will provide the opportunity for each political representative of their respective jurisdiction to grandstand in an attempt to gain recognition. The politicians will be nonstop in their efforts to extract their pound of flesh from AT&T, for their constituents of course.

This is exactly what's going to happen. Moreover, somewhere along the way, all the negative rhetoric will give AT&T's management the perfect "out" to eliminate, suspend, or cut the dividend. At this point, I'm leaning more toward the company using the "suspend" angle. Even if somehow AT&T is able to pull a rabbit out of their hat and escape having to pay billions over the coming years, the headline risk alone will keep the stock at the current 30-year lows. On top of all this, AT&T already was behind the eight ball due to increasing competition and a massive debt load. The fact of the matter is, I have seen the movie several times before. It always ends badly. Here's why.

Seen this movie before

if you have been around long enough, you will hear people say they have been "Kindered." That's referencing one of the most egregious dividend cuts in history.

The Kinder Morgan Dividend Debacle

The Kinder Morgan ( KMI ) management team appeared to be very supportive of the dividend at the time. Nevertheless, I saw the writing on the wall and warned my followers that a dividend cut was imminent in an article published on Dec. 4, 2015, entitled, " Kinder Morgan's Death Spiral Puts the Unthinkable Squarely On The Table." I state:

"I believe the continued sell off in Kinder Morgan's stock has opened the door for a dividend cut. At this point, it's the most prudent move going forward. The excess funds could be used to pay down debt or fund new growth projects. The share price will take a significant hit if that occurs."

Just four days later "the unthinkable" did happen when Kinder Morgan announced in a press release they cut the dividend by 75%. Even though I warned many of the impending doom, I still took a lot of heat for being so bullish previously. Some even suggested my article gave Kinder Morgan management the impetus to enact the cut. I doubt that seriously, yet it was their best choice at the time. The thing was they didn't give the slightest inkling a cut was on the way, much like Lumen ( LUMN ).

The Lumen Dividend Dilemma

Lumen basically did the same thing. I called that dividend cut and share price decline as well.

In fact, I was the only Seeking Alpha analyst to put a sell rating on the stock at the time. Moreover, several authors were very bullish on the stock with " Strong buy " ratings.

Yet, with Lumen I gave my followers much more lead time to get out. In my article published on April 26, 2022, entitled " Lumen: Love Is Blind " I stated:

"Love is blind. That's the primary message behind my father's principle of "never fall in love with a stock." When you fall in love with a stock, it's all moonbeams and shooting stars at first. You're infatuated with the stock and its attributes and your genius for finding this diamond in the rough, often rationalizing away the glaring risk factors.

Lumen's massive yield is extremely enticing, yet I see it as a siren's song or red flag, for those unfamiliar. In the following piece, I will make the case as to why LUMN may not be a suitable income investment vehicle for retirees at this particular juncture. High

This maxim has proven to be true time and time again throughout history. The stock market is littered with fallen high-yield stocks that lured retirees in with a siren's song promising riches with exorbitant yields and explosive growth only to have the dividend slashed and the stock price crater, leaving lovelorn investors broke. Much like the sailors shipwrecked on the rocky coast lured into the craggy nooks by the enchanting music and charming voices of the mythical sirens whispering on the wind of the fortunes to be had."

Since the time of publication, Lumen has cut the dividend completely and the stock price has fallen 84%. These are just a couple of the most recent examples of dividend-paying stocks that have fallen prey to extenuating circumstances and had to eliminate the dividend. Once the dividend cut or elimination is announced, the stock price craters. This is due to the fact the majority of shareholders were in the stock for the dividend income. They all sell out at a huge loss more often than not attempting to preserve whatever principle they may have left.

Principle preservation should be a primary concern

Principle preservation is one of my primary objectives. I know there are some out there that preach you shouldn't pay attention to the stock price and "unrealized" capital losses. You should only be concerned with the "high dividend" income. My brain just isn't wired that way! I'd have a hard time sleeping well at night wondering which one of my numerous high dividend paying stocks was going to blow up next. Below is a current snapshot of my Quality High Yield Portfolio.

My strategy is to zero in a smaller set of what I consider "Quality" high yield dividend paying securities. These are securities that provide the opportunity for capital appreciation or, at the very least, preservation. It's the "total return" of your portfolio you should be concerned with, not just the yield. Needless to say, AT&T is not one of the present holdings.

The Bottom Line

I believe the latest issue with the lead-covered telecom cables is going to be a huge headwind for AT&T. I see no way for them to get out of this without experiencing a significant hit to the bottom line. The fact of the matter is, it may be the best choice for the company to eliminate the dividend at this point. What's more, the additional drag on earnings from the catastrophic cable cataclysm looming on the horizon will be the straw that break's the camel's back. This is no time to be brave. The final thought I'll leave with you with is the fact there are a plethora of other opportunities out there. Furthermore, if you're currently underwater on your position in a taxable account, you may be able to take advantage of the loss by using a tax loss harvesting strategy. I say AT&T is a "no touch" at present. Those are my thoughts on the matter. I look forward to reading yours.

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