Telecommunications company AT&T (New York Stock Exchange:T) has attracted investors with its mature business model featuring high dividend yields backed by historically low volatility and strong cash flow. Despite the lack of strong growth prospects, the company pays a steady and stable dividend with relatively low risk.
Recent turbulent years have contradicted these strengths, but AT&T has since reorganized itself to refocus on its core business. That’s why I remain bullish on the company, as it looks poised to maintain a strong dividend performance for many years to come.
T’s dividend yield is still very attractive
AT&T has paid a consistent dividend since the company went public in the 1980s, making it a benchmark for dividend investing for decades.
But starting in 2022, the company will drastically cut its quarterly dividend by nearly 50%, reducing it from $0.52 to $0.28, ending AT&T’s 35-year streak of dividend increases. This decision was necessitated by the company’s high debt levels. This amounted to about 3.6 times net debt to EBITDA, largely due to the failure of two large acquisitions (DirecTV and Time Warner) that resulted in significant losses.
As shown in the graph below, AT&T Dividend Yield The trajectory has declined sharply since 2021. The company currently offers a yield of around 6% (a 47% payout ratio of profits), which is significantly higher than the telecom sector average of 2.5% and significantly higher than the PCE inflation rate of 2.7%. Despite the recent downturn, AT&T remains an attractive income stock alternative.
Dividend safety: Management is unlikely to disappoint shareholders
Over the past two years, AT&T’s investment thesis has taken a beating and its sustainability has been questioned. However, starting in 2022, the company has reported a steady quarterly dividend.
In 2023 AT&T generated free cash flow (FCF) of $20.46 billion. And it paid out $8.13 billion in dividends, meaning that only 39% of its FCF went to dividends. This suggests that the company has significant room for adjustment if its cash flow declines, potentially avoiding a dividend cut, less reinvestment in the business, or increased borrowing.
This is a significant improvement from 2022, when 77% of FCF was allocated to dividends. It is important to note that AT&T’s cash flow in 2022 was negatively impacted by certain operations. This year marked a strategic shift to focus on our core communications business, including completing the spinoff of WarnerMedia. The sale reduced AT&T’s revenue and cash flow from media operations, impacting its overall FCF.
AT&T also significantly increased capital spending by investing in 5G infrastructure and expanding its fiber network. While these investments are important for maintaining competitiveness, they have increased immediate cash outflows and reduced FCF in the short term.
With cash flow normalizing in 2023, dividend payments are likely to remain stable for the next several years. AT&T’s ability to reduce debt and reach its 2.5x leverage target (net debt to EBITDA) by the first half of 2025 further supports this stability.
Comments from CEO John Stankey on AT&T’s latest quarterly earnings call suggest management is taking a flexible approach to dividends.
They plan to adjust the dividend yield in line with prevailing economic conditions, adding: “We understand the desire to treat our shareholders well. We will then assess where things like interest rates are. We will then evaluate where we stand in the dividend yield relative to the value of the stock. “We will assess whether there are any opportunities to reinvest in the business,” he said.
The valuation is relatively discounted
In terms of valuation, AT&T’s 8.3x projected price-to-earnings ratio (P/E) is almost identical to Verizon’s 8.3x projected price-to-earnings ratio.New York Stock Exchange: VZ) in the US it’s 8.7 times, but T-Mobile’s (NASDAQ:TMUS) 19x. Internationally, Vodafone’s future P/E is still low.NASDAQ:VOD) 24.2x and America Movil’s (New York Stock Exchange: AMX) 11.6 times.
Unlike its domestic competitors, AT&T’s strategy is focused on core business operations, while Verizon and T-Mobile pursue strategies based on mergers and acquisitions (M&A) and new product lines. This conservative approach may limit AT&T’s growth compared to its peers, but it makes its dividend thesis more attractive.
Despite AT&T’s minimal growth estimates through the end of 2024, which predict less than a 1% increase in revenue, company executives see AI as a great opportunity for the carrier. AI can help AT&T reduce costs, accelerate leverage, and drive EBITDA growth by providing improved service to customers.
Is AT&T stock a buy, according to analysts?
Wall Street sentiment on AT&T stock is primarily bullish, with 12 analysts rating the stock a Strong Buy. Only three analysts have a Hold rating and none are Downgrade. that much Average T Stock Price Target Price Analysts see an upside potential of 14.7% for the company at $21.50.
conclusion
After four or five years of turbulence, AT&T now appears to be in a stable position and ready to continue delivering attractive returns to shareholders. The company’s strategy is to move away from ambitious M&A and focus on its core telecom business and deleveraging, and it is trading at a discount to its peers.
AT&T management also appears to be committed to maintaining an attractive dividend yield, reflecting its commitment to shareholder value. This stability, combined with the company’s strategic focus and financial discipline, positions AT&T well for inclusion in a portfolio of high-quality dividend growth stocks.
