American mobile phone operator AT&T (NYSE: T) is a stock that polarizes investors. The stock price has fallen nearly 30% over the past decade, which is a tough pill to swallow. However, when you include AT&T’s famous high-yield dividend, the stock has generated a positive return of 50%.
Indeed, dividends can have a powerful impact on investment returns.
More than yields, retirees rely on dividends for the passive income they provide, which can help pay for living expenses. For these investors, a high dividend yield that they can trust to keep coming quarter after quarter is paramount.
So, can you trust AT&T’s 5.8% yield?
AT&T cuts dividend in 2022
A company that recently cut its dividend probably doesn’t inspire confidence, but that’s exactly what AT&T did in early 2022. The telecom company squandered much of the last decade on massive mergers to acquire DirecTV ($49 billion) and Time Warner ($85 billion) to expand into media. It ultimately failed, forcing AT&T to sell DirecTV and spin off its Time Warner assets by 2022, leaving the company with more than $200 billion in long-term debt.
Dividend investors hate to see dividend cuts, but this cut was necessary. It freed up cash flow to help pay down debt. With the cash injection from the Time Warner spinoff, AT&T reduced its long-term debt to $132 billion. There’s still work to be done, but it’s a huge relief, especially in a higher interest rate environment where any restructured debt will come with higher interest costs.
The balance sheet is in much better shape today, allowing investors to focus on AT&T’s cash flow to determine the safety of its dividend. A healthier balance sheet means less risk of a further cut if the company suffers an unexpected downturn. In other words, the cut has arguably made the dividend safer today.
Can AT&T’s Cash Flow Support Its Dividend?
Think about everything you do on your smartphone. You access the internet, stream content, and stay in touch with friends and family. Most people will pay their AT&T bill more than many others, even in a crisis. This makes AT&T a stable company with reliable profits. AT&T’s cash flow is reliable, fluctuating mainly due to the company’s investments in network upgrades and maintenance.
AT&T free movement of capital This is the discretionary cash earnings left over after investing in the company. Management expects AT&T to generate free cash flow of between $17 billion and $18 billion this year. The company spends about $2 billion on each quarterly dividend, meaning it has an annual dividend expense of $8 billion. That’s only 45% of AT&T’s cash flow this year. AT&T’s business would have to collapse for cash earnings to fall enough that the company wouldn’t cover its cash dividend.
Never say never, but it’s hard to imagine AT&T’s telecom business collapsing like this. Business is booming. The company added 349,000 net new customers to its wireless business in the first quarter and estimates that its 0.72% churn rate (the number of customers who leave their accounts) is the best in the industry.
The dividend is healthy and the future is bright
Retirees don’t need to worry about AT&T’s dividend. The company is now on solid financial footing, barring any unforeseen catastrophe. AT&T’s dividend should become increasingly secure as the company continues to pay down its debt in the years ahead.
Additionally, its momentum in the wireless sector should translate into earnings growth. Analysts estimate that AT&T will grow its earnings by an average of 2% per year over the next three to five years. That won’t rock your world, but it will be enough to occasionally raise its dividend without impacting the bottom line. The distribution ratio.
I wouldn’t bet my life that AT&T will outperform the broader stock market anytime soon, but retirees looking for a high dividend yield they can count on should look no further.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Can Retirees Still Trust AT&T’s 5.8% Dividend Yield? was originally published by The Motley Fool
