American mobile provider AT&T (NYSE: T) is a polarizing stock among investors. Shares have fallen nearly 30% in price over the past decade, which is a bitter pill to swallow. However, factor in AT&T’s famously high-yielding dividend, and shares have generated a positive 50% return.
Dividends can indeed have a big impact on investment returns.
Retirees depend on dividends more than yield for the passive income they provide, which can help pay for living expenses. For these investors, a high dividend yield that they can count on coming quarter after quarter is the most important thing.
Can You Trust AT&T’s 5.8% Yield?
AT&T to Cut Dividend in 2022
A company that recently cut its dividend probably doesn’t inspire confidence, but that’s exactly what AT&T did in early 2022. The telecom company wasted much of the past decade on massive mergers to acquire DirecTV ($49 billion) and Time Warner ($85 billion) as it expanded into media. The move ultimately failed, leading AT&T to sell DirecTV and spin off its Time Warner assets in 2022, leaving the company with more than $200 billion in long-term debt.
Dividend investors hate dividend cuts, but cutting the dividend was admittedly necessary. Cutting the dividend freed up cash flow to pay down debt. With a capital injection from spinning off Time Warner, AT&T reduced its long-term debt to $132 billion. There’s more work to do, but that’s a huge relief, especially in a higher-interest-rate environment where any debt restructuring comes with higher interest charges.
The balance sheet is now in much better shape, allowing investors to focus on AT&T’s cash flows to gauge the safety of the dividend. A healthier balance sheet means less risk of another cut if the company experiences an unexpected downturn. In other words, the cut has likely made the dividend safer today.
Can AT&T’s cash flows support the dividend?
Think about all the things you do on your smartphone. You access the internet, stream, and stay in touch with friends and family. Most people pay their AT&T bills earlier than most, even during tough times. That makes AT&T a stable company with reliable profits. AT&T’s cash flow is reliable and fluctuates largely because of how much the company invests in upgrading and maintaining its network.
AT&T’s free cash flow is the discretionary cash earnings left over after the investment in the company. Management expects AT&T to generate free cash flow of $17 billion to $18 billion this year. The company spends about $2 billion on each quarterly dividend, which means an annual dividend payout of $8 billion. That’s just 45% of AT&T’s cash flow this year. AT&T’s business would have to fall flat on its face for its cash earnings to shrink enough that the company couldn’t cover its dividend with cash.
Never say never, but it’s hard to imagine AT&T’s telecom business collapsing like this. Business is booming. The company added 349,000 net additions to its wireless business in Q1 and says its 0.72% churn rate (the number of customers who leave) is the best in the industry.
The dividend is healthy and the future looks bright
Retirees need not worry about AT&T’s dividend. It is now on rock-solid financial footing, barring some unforeseen disaster. AT&T’s dividend should only become more secure as the company continues to pay down debt in the coming years.
What’s more, the momentum in the wireless sector should translate into earnings growth. Analysts estimate that AT&T will grow earnings by an average of 2% per year over the next three to five years. That won’t rock your world, but it’s enough to squeeze out occasional dividend hikes without hurting the payout ratio.
I wouldn’t bet my money on AT&T outperforming the rest of the stock market anytime soon, but retirees looking for a high dividend yield they can count on need to look no further.
Should You Invest $1,000 in AT&T Now?
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Justin Pope 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.
Can Retirees Still Have Confidence in AT&T’s 5.8% Dividend Yield? was originally published by The Motley Fool
