AT&T(NYSE:T) currently offers a very attractive dividend. With a return of 5%, the telecom giant’s payout is several times higher than the S&P500 (less than 1.5%). However, that higher return comes with a higher risk profile.
On a more positive note, AT&Tsdividendis to grow safer every quarter. That’s evident from the company’s recent third-quarter earnings report, which showed continued improvement in several key financial metrics.
AT&T reported somewhat mixed third-quarter results at first glance. Revenue fell 0.5% from the same period last year to $30.2 billion, while adjusted earnings per share fell 6.3% to $0.60. Cash flow from operating activities and free cash flow also decreased year on year (1% and 1.7% respectively).
However, there were some positive developments during the quarter. AT&T has adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 3.4% to $11.6 billion thanks to strong mobility performance and growth in the company’s fiber business. Mobility services revenues rose 4% to $16.5 billion, while consumer broadband revenues rose 6.4% to $2.8 billion.
Despite severe weather and a work stoppage in the Southeast, the company added more than 200,000 fiber customers for the 19th quarter in a row. Meanwhile, it is continuously expanding its mobility activities.
Moreover, free cash flow was lower during the period (at $5.1 billion), AT&T has increased its free cash flow by $2.4 billion year to date compared to the same period in 2023. That allows the company to pay down debt. The country reduced its net debt by $1.1 billion and $2.9 billion in the last quarter year after yearwhich reduces it leverage ratio from 2.99 times to 2.82 times.
With free cash flow rising and the leverage ratio falling, AT&T’s high-yield dividend is becoming increasingly safe.
AT&Ts key Financials should continue to improve in the coming quarters. Growth in the company’s mobility and fiber businesses should boost earnings and cash flow, allowing the company to lower its debt ratio as it pays down additional debt.
The company expects the leverage ratio to reach its target of 2.5 times in the first half of next year. That would bring the level around the current level of its main rival Verizon(NYSE: VZ)which has reduced its leverage ratio from 2.6 times to 2.5 times over the past year. Verizon is currently on track to reduce its leverage ratio to about 2.3 times by the end of next year.
However, its leverage ratio will rise after it completes its $20 billion all-cash deal Border communicationa move the company is making to better compete with AT&T in the field of fiber optic. That will likely be a temporary problem, as Verizon’s influence should diminish within two years of the deal closing.
While Verizon’s leverage ratio will increase in the future, AT&T’s should continue to decline. The company recently agreed to sell its remaining 70% stake in DIRECTV to its joint venture partner. It expects to receive $7.6 billion in cash payments over the next few years, which it plans to use to further strengthen its balance sheet.
With further balance sheet improvements on the horizon, AT&T could finally be that in position to start ascending its dividend again. The telecom giant has reset its payout in 2022 and cut it by almost 50% after the spin-off of its former media division to Warner Bros. Discovery. Being diminished dividend to keep more money Unpleasant to grow its fiber optic and mobility activities and reducing debt.
WIf that strategy pays off now, the company would be able to are starting to return more money to shareholders through dividend increases and share buybacks. It has fallen well behind Verizon in dividends in recent years, given its rival’s continued increases (18 consecutive years). Verizon currently offers a 6.5% payout, backed by stronger and better financial metrics.
AT&T’s strategy is working. CEO John Stankey stated in the third quarter earnings report: “We are investing at the top of the industry, reducing debt and growing free cash flow year to date.” This gives the company increasing confidence in its ability to deliver better and better results.
It also puts the company’s high-yield dividend on a firmer foundation. Although AT&T lags behind rival Verizon in some areas important for dividend investors, this could catch up in the coming years. In the meantime, it becomes a much safer option for those looking for a stable income stream.
Consider the following before buying stock in AT&T:
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Matt DiLallo holds positions at Verizon Communications. The Motley Fool has positions in and recommends Warner Bros. Discovery on. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
AT&T’s 5% Yielding Dividend Continues to Grow Safer was originally published by The Motley Fool
