AT&T (NYSE:T) recently unveiled its updated strategic plan, which provides investors with financial guidance through 2027. The telecom giant expects to generate growing free cash flow over that period, much of which it plans to return to shareholders.
However, the additional cash return will not come from an increase in the high-yield dividend (yield of almost 5%). Instead, the telecom company plans to buy back boatloads of its inventory.
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AT&T has repositioned its activities and balance sheet in recent years. It has divested non-core assets such as its media division and stake in DIRECTV. It has used its cash flow to invest in expanding its mobile and broadband businesses, while using excess free cash flow after dividends to pay down debt.
The telecom company’s strategy is working. It expects to grow its revenue by a low single-digit percentage over the next three years. It also expects that adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) will grow 3% or more each year over that period, supported in part by expectations that it will achieve more than $3 billion in annual cost savings by 2027. That positions the company to generate robust and growing cash flow.
AT&T expects to reinvest approximately $22 billion of its annual cash flow in capital investments between 2025 and 2027 time frame. That has it on pace to generate a growing stream of free cash flow. The telecom giant expects its free cash flow to exceed $16 billion next year. The country will then see its free cash grow by more than $1 billion annually, reaching more than $18 billion by 2027.
The company also remains on track to achieve its goals leverage ratio from 2.5 times in the first half of next year. It is expected that this level can be maintained until 2027.
AT&T expects its plan shall providing it with approximately $50 billion by financial capacity for the next three years. That will come from growing free cash flow, expected cash flow from the sale of its 70% stake in DIRECTV ($5.4 billion by mid-2025), and balance sheet capacity from maintaining its leverage target.
The company plans to return more than $40 billion of this freed-up financial capacity to investors over the next three years. The base return will come from maintaining the current dividend payout of $1.11 per share ($0.2775 per quarter). That payment alone will amount to more than $20 billion in cash section to shareholders during the plan period.
The remaining cash return will come from the purchase of own shares. The company’s board of directors has authorized an initial share buyback program worth $10 billion. The company expects this to start once it reaches its target leverage next year. It expects this program to be completed by the end of 2026. AT&T expects to approve another $10 billion in stock buybacks in 2027.
While dividend investors may be disappointed that AT&T doesn’t increase the payment, the buyback does a lot of financial sense. AT&T currently trades at about 10 times its share price future price-earnings ratio (P/E).. That’s a discount of more than 50% to the broader market, considering that the S&P500 trades at 23 times forward earnings. With a market cap of approximately $165 billion, AT&T could retire more than 10% of its market cap outstanding shares, which would give a boost the earnings per share by a comparable amount.
The company expects to have an additional $10 billion in incremental financial flexibility during this period. It could use that money for additional organic investments, acquisitions, debt repayments, dividends or stock buybacks.
AT&T’s turnaround plan took several years to complete. However, it has finally reached the inflection point where it can return more money to investors. While that won’t come through a higher dividend, the company’s plan to buy back shares could allow it to generate higher total returns for investors in the long run, given how cheap the shares are today. Meanwhile, investors will still be able to collect a very high-yielding dividend, supported by its strong cash flow and balance sheet. That’s why it’s ideal for those looking for a bond-like income stream to ride what could be a nice rise in the share price as its buybacks gain momentum.
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Matt DiLallo 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.
AT&T expects to return another $20 billion in cash to investors by 2027 (just not via a higher dividend) was originally published by The Motley Fool
