AT&T Telecommunications Company (New York Stock Exchange: T) has always attracted investors with its mature business model characterized by low volatility and high dividend yield supported by robust cash flows. Despite the lack of strong growth prospects, the company regularly pays stable dividends with relatively low risk.
The past few years of turbulence have contradicted these strengths, but AT&T has since reorganized itself by refocusing on its core business. It is well-positioned to continue generating strong dividend results in the years to come, which is why I am bullish on the company.
T’s dividend yield remains very attractive
AT&T has been paying dividends consistently since going public in the 1980s, establishing itself as a benchmark in dividend investing for decades.
However, starting in 2022, the company made a significant reduction of almost 50% in its quarterly dividend, taking it from $0.52 to $0.28, which marked the end of a streak of 35 years of dividend increases for AT&T. The move was necessitated by the company’s high level of debt, which reached approximately 3.6 times net debt to EBITDA, primarily due to two large and ultimately unsuccessful acquisitions (DirecTV and Time Warner) that resulted in substantial losses.
As the graph below shows, AT&T Dividend Yield AT&T’s return trajectory has declined sharply since 2021. Currently, the company yields around 6% (with a payout ratio of 47% of its earnings), significantly higher than the telecom industry average of 2 .5% and well above the PCE inflation rate of 2.7%. Despite the recent pullback, AT&T remains an attractive fixed income stock alternative.
Dividend Safety: Management Unlikely to Disappoint Shareholders
Over the past two years, AT&T’s investment thesis has taken a hit, raising questions about its sustainability. However, since 2022, the company has declared stable quarterly dividends.
In 2023, AT&T generated $20.46 billion in free cash flow (FCF) and paid $8.13 billion in dividends, implying that only 39% of free cash flow was used for dividends. This suggests that the company has substantial headroom should its cash flow decline, potentially avoiding dividend cuts, reduced company reinvestments, or increased borrowing.
This is a significant improvement over 2022, when 77% of its free cash flow was allocated to dividends. It is important to note that in 2022, AT&T’s cash flow was negatively impacted by specific operations. The year marked a strategic shift to focus on its core telecommunications business, including the completion of the spinoff of WarnerMedia. This divestiture reduced AT&T’s revenue and cash flow from media operations, impacting overall free cash flow.
Additionally, AT&T has significantly increased its capital expenditures by investing in 5G infrastructure and expanding its fiber optic network. These investments, while crucial to maintaining competitiveness, have resulted in greater immediate cash outflows, thereby reducing short-term free cash flow.
With cash flow normalizing in 2023, it is likely that dividend payments will remain stable over the next few years. AT&T’s ability to reduce its debt and target a debt target of 2.5x (net debt to EBITDA) by the first half of 2025 further reinforces this stability.
CEO John Stankey’s comments during AT&T’s latest quarterly earnings conference call indicate that management is taking a flexible approach to dividends.
They plan to adjust their dividend yield to align with current economic conditions, saying: “We’re very conscious of our desire to make sure that we’re treating our shareholders well. So we’ll assess where things are like interest rates. We’ll assess where we are in terms of dividend yield relative to the value of the stock and where we have opportunities to reinvest in the business.
The valuation is relatively low
On the valuation side, AT&T’s forward price-to-earnings (P/E) ratio of 8.3x is nearly in line with Verizon’s (New York Stock Exchange: VZ) 8.7x in the United States. However, this is much lower than T-Mobile (NASDAQ:TMUS) 19x. Internationally, its forward P/E is still lower than that of Vodafone (NASDAQ: VOD) 24.2x and America Movil (New York Stock Exchange: AMX) 11.6x.
Unlike its domestic peers, AT&T’s strategy remains focused on its core businesses, while Verizon and T-Mobile pursue strategies based on mergers and acquisitions (M&A) and new product lines. While this conservative approach may limit AT&T’s growth relative to its peers, it reinforces the appeal of its dividend thesis.
Despite forecasting minimal growth for AT&T through the end of 2024, with its revenue expected to increase by less than 1%, the company’s management sees AI as a great opportunity for telecom. AI can help AT&T reduce costs, accelerate deleveraging, and drive EBITDA growth by providing improved services to its customers.
Is AT&T Stock a Buy, According to Analysts?
Wall Street sentiment on AT&T stock is overwhelmingly bullish, with the consensus of 12 analysts rating it a strong buy. Only three analysts have a hold rating, and none are bearish. average price target of the T stock Among analysts, it stands at $21.50, indicating a 14.7% upside potential for the company.
The essential
After the turbulent period of the last four to five years, AT&T now appears to be in a stable position and ready to continue to deliver attractive returns to its shareholders. The company’s strategy is focused on its core telecommunications business and on deleveraging, away from ambitious mergers and acquisitions, and it trades at a discount to its peers.
Additionally, AT&T management appears committed to keeping the dividend yield at attractive levels, reflecting its commitment to shareholder value. This stabilization, coupled with the Company’s strategic focus and financial discipline, positions AT&T favorably for inclusion in a portfolio of high-quality, dividend-growing stocks.
