Telecommunications giant AT&T (T 0.58%) is a household name and a well-known dividend stock. Had you invested $100 in AT&T in 1995, your investment would have grown to $476 today. Is that good? Well, it definitely needs context. Many investors buy AT&T for its huge dividend, which yields an impressive 6.5% at its current share price.
But a lot more goes into investment results than just a dividend. So let's take a closer look at AT&T and use its past to help determine whether it's worth holding for the future.
The difference a dividend makes (or doesn't)
Are you a glass-half-full or glass-half-empty type of character? AT&T has multiplied an initial $100 investment to nearly $500 over the years. However, that incorporates total returns, share price gains and losses, and dividends paid. Take the dividends away, and you would have lost money!
The dividend optimist might argue that dividends were the difference between losing and multiplying their money. That's true, but even the total returns have dramatically trailed those of the S&P 500 index, which would have turned the same $100 into more than $1,200.
The bottom line? Yes, dividends can significantly boost your total returns over the long term, especially when you reinvest them to turbocharge your compounding snowball. But there is far more to a stock than its dividend. The dividend alone doesn't make an investment great.
Where AT&T falls short
It's time to change your gaze and focus on AT&T's broader business performance. A great company generates value for its shareholders over time. That's the most basic definition of a great investment.
So how has AT&T done since 1995? A company's return on invested capital (ROIC) measures the return it generates when it invests in the business. A high return means it can put resources in and get a lot out. AT&T's business is currently generating a negative ROIC, meaning it's destroying value when it invests.
T Return on Invested Capital data by YCharts
Meanwhile, AT&T's earnings per share have gone up and down but are lower today than nearly three decades ago! The same can't be said for its debt, which has exploded higher over the years and stands at $138 billion today.
You can see the slopes of each line above, but here are some percentages. AT&T's ROIC has fallen over 200%, turning negative. Earnings are 20% lower today than in 1995. Lastly, debt has increased by a staggering 1,750%.
AT&T is far worse off than it once was fundamentally, which has much to do with the stock's poor performance.
A turnaround on the way?
The company's debt load peaked after it tried and failed to enter the entertainment media industry with massive acquisitions of DirectTV and Time Warner, worth tens of billions of dollars. AT&T has since spun off those assets and used the proceeds to pay down debt.
That's the first step to a long-term turnaround because all that interest expense, which is $6.5 billion over the past year, takes away from AT&T's bottom line. Cash flow is pretty strong, with about $12 billion left after paying the dividend. The balance sheet should heal, but it could take at least a few years.
AT&T must still grow; analysts see just 3% annual earnings growth over the next three to five years. Management must also still show it can responsibly invest AT&T's money. Ideally, a great stock can pay dividends and still perform well enough to create long-term value and grow. AT&T hasn't yet shown enough to forgive it for three decades of mediocrity.
