Telecom company AT&T (NYSE:T) has historically attracted investors with its mature business model characterized by low volatility and a high dividend yield supported by robust cash flows. Despite lacking strong growth prospects, the company consistently pays steady dividends with relatively low risk.
Recent turbulent years have contradicted these strengths, but AT&T has since reorganized by refocusing on its core business. It is poised to remain a strong dividend performer for years to come, which is why I hold a bullish stance on the company.
T’s Dividend Yield Remains Highly 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 quarterly dividend cut of almost 50%, reducing it from $0.52 to $0.28, which marked 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 reached about 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 depicted in the graph below, AT&T’s dividend yield trajectory has sharply declined since 2021. Currently, the company offers a yield of around 6% (with a payout ratio of 47% of its profits), significantly higher than the telecom sector average of 2.5% and well above the PCE inflation rate of 2.7%. Despite the recent pullback, AT&T remains a compelling income stock alternative.
Dividend Safety: Management Likely Won’t 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 reported stable quarterly dividends.
In 2023, AT&T generated $20.46 billion in free cash flow (FCF) and paid out $8.13 billion in dividends, implying that only 39% of FCF was used for dividends. This suggests the company has substantial room to maneuver if its cash flow decreases, potentially avoiding dividend cuts, a reduction in business reinvestment, or an increase in borrowing.
This is a significant improvement compared to 2022, when 77% of its FCF was allocated to dividends. It’s important to note that in 2022, AT&T’s cash flows were adversely affected by specific operations. The year marked a strategic shift to focus on its core telecom business, including the completion of the WarnerMedia spinoff. This divestiture reduced AT&T’s revenue and cash flow from media operations, impacting overall FCF.
Additionally, AT&T significantly increased its capital expenditures by investing in 5G infrastructure and expanding its fiber network. These investments, while crucial for maintaining competitiveness, resulted in higher immediate cash outflows, reducing FCF in the short term.
With the normalization of cash flows in 2023, it is likely that dividend payments will remain stable over the next few years. AT&T’s ability to reduce debt and aim for a 2.5x leverage target (net debt to EBITDA) by the first half of 2025 further supports this stability.
CEO John Stankey’s comments during AT&T’s most recent quarterly earnings call indicate that management is taking a flexible approach to dividends.
They plan to adjust their dividend yield to align with prevailing economic conditions, saying, “We’re very cognizant of a desire to ensure that we’re treating our shareholders well. We’ll evaluate at that time where things like interest rates stand. We’ll evaluate where we are on the dividend yield relative to the equity value and where we have opportunities for reinvestment in the business.”
The Valuation Is Relatively Discounted
On the valuation side, AT&T’s 8.3x forward price-to-earnings ratio (P/E) is almost in line with Verizon’s (NYSE:VZ) 8.7x in the U.S. However, it’s much lower than T-Mobile’s (NASDAQ:TMUS) 19x. Looking internationally, its forward P/E is still lower compared to Vodafone’s (NASDAQ:VOD) 24.2x and America Movil’s (NYSE:AMX) 11.6x.
Unlike its domestic peers, AT&T’s strategy remains focused on its core business operations, 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 enhances the attractiveness of its dividend thesis.
Despite minimal growth estimates for AT&T through the end of 2024, with a less than 1% increase expected in its top line, the company’s management sees AI as an excellent opportunity for telecoms. AI can help AT&T reduce costs, accelerate deleveraging, and boost EBITDA growth by offering enhanced services to its customers.
Is AT&T Stock a Buy, According to Analysts?
Wall Street’s sentiment towards AT&T stock is predominantly bullish, with the consensus among 12 analysts rating it as Strong Buy. Only three analysts have a Hold rating, and none are bearish. The average T stock price target among analysts stands at $21.50, indicating upside potential of 14.7% for the company.
The Bottom Line
After the turbulent period of the last four to five years, AT&T now appears to be in a stable position and poised to continue delivering an attractive yield to its shareholders. The company’s strategy is focused on its core telecom business and deleveraging, shifting away from ambitious M&A, and it is trading at a discounted valuation compared to its peers.
Further, management at AT&T appears committed to maintaining the dividend yield at attractive levels, reflecting their dedication 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.
Source: finance.yahoo.com