AT&T telecommunications company (New York:T) has historically attracted investors with its mature business model featuring low volatility and high dividend yields backed by strong cash flows. Despite lacking strong growth prospects, the company consistently pays a consistent dividend with relatively low risk.
Recent turbulent years have contradicted these strengths, but AT&T has since reorganized itself by refocusing on its core business. It is poised to maintain strong dividend performance for years to come, which is why I remain bullish on the company.
T’s dividend yield remains very compelling
AT&T has been a consistent dividend payer since the company went public in the 1980s, establishing itself as a benchmark in dividend investing for decades.
However, starting in 2022, the company made a significant cut in its quarterly dividend by about 50%, from $0.52 to $0.28, marking the end of a 35-year streak of dividend increases for AT&T. The decision was necessitated by the company’s high debt levels, which amounted to approximately 3.6 times net debt to EBITDA, primarily due to two large and ultimately unsuccessful acquisitions (DirecTV and Time Warner) that resulted in significant losses.
As shown in the chart below, AT&T’s dividend yield AT&T’s trajectory has declined sharply since 2021. Currently, the company is offering a yield of about 6% (with a payout ratio of 47% of its earnings), which is well above the telecom sector average of 2.5% and well above the PCE inflation rate of 2.7 %. Despite the recent decline, AT&T remains a compelling income stock alternative.
Dividend integrity: Management is less likely to let shareholders down
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 been declaring a stable quarterly dividend.
In 2023, AT&T generated free cash flow of $20.46 billion The company paid $8.13 billion in dividends, meaning that only 39% of its free cash flow was used for dividends. This suggests that the company has plenty of room to maneuver if its cash flow declines, which could result in it avoiding cutting the dividend, reducing reinvestment in the business, or increasing borrowing.
This is a significant improvement from 2022, when 77% of 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 saw a strategic shift to focus on its core communications business, including the completion of WarnerMedia. This divestiture reduced AT&T’s revenue and cash flow from media operations, impacting overall FCF.
Additionally, AT&T has significantly increased its capital expenditures by investing in 5G infrastructure and expanding its fiber network. Although these investments are important in maintaining competitiveness, they have led to higher direct cash outflows, which has reduced free cash flow in the short term.
With cash flows normalizing in 2023, dividend payments are likely to remain stable over the next few years. AT&T’s ability to reduce debt and the goal of achieving a 2.5x leverage ratio (net debt-to-EBITDA ratio) by the first half of 2025 further supports this stability.
CEO John Stankey’s comments during AT&T’s recent quarterly earnings call suggest that management is taking a flexible approach to dividends.
They plan to adjust their dividend yield to reflect prevailing economic conditions, saying: “We are very conscious of wanting to make sure we are treating our shareholders well. We will at that time evaluate the position of things like interest rates. We will evaluate where we are with our dividend yield relative to the value of the stock and where we have opportunities to reinvest in the business.
The rating is discounted relatively.
Valuation-wise, AT&T’s forward price-to-earnings ratio of 8.3x is roughly in line with Verizon’s (New York Stock Exchange: Win) 8.7x in the US, however, it is significantly lower than T-Mobile (NASDAQ: TIMOS) 19x. Looking globally, the company’s future P/E ratio is still lower compared to Vodafone (NASDAQ: VOD) 24.2x and America Movil’s (New York:AMX) 11.6x.
In contrast to its domestic peers, AT&T’s strategy remains focused on its core business, while Verizon and T-Mobile pursue strategies that rely on mergers and acquisitions and new product lines. While this conservative approach may limit AT&T’s growth relative to its peers, it enhances the attractiveness of its dividend thesis.
Despite AT&T’s sluggish growth forecast through the end of 2024, with less than 1% growth in net profit expected, the company’s management sees AI as an excellent opportunity for telecom companies. AI could help AT&T cut costs, accelerate debt reduction, and boost EBITDA growth by offering improved services to its customers.
Is AT&T stock a buy according to analysts?
Wall Street sentiment on AT&T stock is mostly bullish, with the consensus among 12 analysts rating it a Strong Buy. Only three analysts have a Hold rating, and none are bearish. Average stock price target Among analysts, the stock price reached $21.50, indicating 14.7% upside potential for the company.
bottom line
After a turbulent period for the company over the past four or five years, AT&T now appears to be in a stable position and poised to continue generating an attractive return for its shareholders. The company’s strategy focuses on its core business in the field of communications, reducing debt, and staying away from ambitious mergers and acquisitions. The company is also trading at a discounted valuation compared to its peers.
Furthermore, management at AT&T appears committed to maintaining the dividend yield at attractive levels, reflecting its dedication to shareholder value. This stability, coupled with the company’s strategic focus and financial discipline, positions AT&T favorably for inclusion in a group of high-quality, growing dividend stocks.