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AT&T Earnings: Don't Panic


Free cash flow came in lower than we expected.

DIRECTV push is going at full throttle.

Valuation still remains attractive in spite of YTD gains.

AT&T (NYSE:T) reported its first quarter earnings after hours on Tuesday as covered here on Seeking Alpha. Revenue came inline and EPS beat by three cents. However, the number we are focusing on in this article is the free cash flow.

In our earnings preview, we mentioned we expected the company to report at least $3.60 billion in free cash flow for the quarter. This number was calculated based on what AT&T and DIRECTV reported in the corresponding first quarter in 2015 as separate companies. The company ended up reporting $3.2 billion, which is about 11% lower than what we expected. Is that enough reason to panic? Let's find out.

  • In the same quarter of 2015, AT&T's dividends consumed 84% of the free cash flow.
  • The company has 6.15 billion shares outstanding and based on the current quarterly dividend of 48 cents, it needed $2.95 billion in free cash to cover dividends.
  • The $3.20 billion generated in cash flow means that the dividend coverage based on free cash flow was 92%. That is, $2.95 billion divided by $3.20 billion.
  • While this number is higher than the 84% noted above for the same quarter in 2015, let us calculate the average of the three post-DIRECTV quarters so far with the...