Is AT&T a Good Stock To Own?

AT&T (NYSE:T) has been a favorite stock of investors seeking dividend income for decades. The telecommunications company is known for its long history of regular distributions. Recently, though, the company has lost its footing, calling its status as a top dividend stock into question. So, is AT&T a good stock to own now?

 

In terms of yield, AT&T is still quite attractive. The stock currently yields 6.02 percent, paying $1.11 per share annually.

 

Given that the S&P 500 overall only yields about 1.5-2 percent, this makes AT&T an unusually high income producer in today’s environment.

 

It should be noted, however, that AT&T’s yield is currently at a high due to a drop in share prices that followed the company’s Q2 earnings report.

AT&T’s dividend growth, however, hasn’t been nearly as positive.

 

Over the last 10 years, the dividend has increased at a minuscule annualized rate of just 0.14 percent. The three and five-year rates are -4.38 and -1.86 percent, respectively.

 

These numbers are skewed by a nearly 50 percent dividend cut announced in February. That cut occurred when AT&T decided to spin off media properties it had acquired under previous management.

 

With the recent slash, AT&T likely improved the safety of its dividend. The question, though, is whether more such cuts could be ahead.

 

The company’s Q2 report was generally positive, with $29.6 billion in revenue reported against $29 billion in Q2 2021.

 

AT&T also added 1.5 million new post-paid mobile customers in the first six months of 2022.

 

Fiber optic internet was also a major winner with customers, growing by about 28 percent year-over-year in terms of revenue. These growth figures suggest that the company is regaining ground and support the idea that the dividend is safe in its current form.

One of the more negative indicators for AT&T’s dividend is the fact that free cash flow will be weaker than initially expected in 2022.

 

The Q2 earnings report detailed the downgrade, with management projecting $14 billion in FCF instead of the initial expectation of $16 billion.

 

More worrying still is the fact that this downgrade follows an established pattern of shrinking FCF at AT&T.

 

Full-year FCF was $29 billion as recently as 2019. Given that cash flow is still shrinking, it’s possible that this trend could eventually put pressure on AT&T’s ability to maintain its high dividend payout.

The current dividend, however, appears to have a good amount of cushion built into it. The trailing 12-month payout ratio is just 48.7 percent, suggesting that AT&T is more than capable of maintaining its present payout.

 

As long as it can arrest the fall of its free cash flow before it reaches a critical point, AT&T is unlikely to require another dividend cut.

 

A final point to consider with regard to AT&T’s dividend safety is its payout history.

 

Prior to the pandemic, AT&T had been raising its dividend for 36 consecutive years. Management is likely keen to begin rebuilding the company’s reputation as a stable dividend producer. As such, it’s unlikely that AT&T would cut its dividend again unless it became absolutely necessary.

 

When the February dividend cut was announced, CEO John Stankey made it clear that he believed the money could be re-invested in the business at a higher rate of return. If true, this should help AT&T grow and eventually reverse the trend of falling free cash flows.

 

The approach of re-investing into the business also follows the noted path of Warren Buffett, who famously believes that dividends should only be paid when the money cannot be re-invested at more favorable rates.

 

Over time, this renewed investment in growth could help AT&T begin raising its dividend again. Building out more fiber optic internet and 5G network capabilities will allow the company to offer consumers the latest telecommunications technologies and raise revenues in the process.

 

However, these investments could take some time to pay off. In the meantime, the larger outlays will make it more difficult for AT&T to raise its dividend. Investors may see small dividend increases over the next few years, but it’s not likely that AT&T will raise the payout at a rapid rate anytime soon.

 

Beyond its payout, the stock could have a respectable upside this year. The median 12-month analyst target price for AT&T is $22, up 20.58 percent from the most recent price of $18.25. This lends weight to the argument for buying the stock, as the combined share price growth and dividend yield would add up to a very respectable return.

 

Even though dividend growth could be slow for the next few years, it’s also worth keeping in mind that AT&T is already paying 6 percent at today’s price. Assuming there are no further cuts, this still makes it a strong income-generating asset.

 

The risks, however, could temporarily outweigh the benefits when it comes to AT&T’s dividend. Shrinking free cash flows, ongoing inflation pressures and uncertainty as the company refocuses on its core telecommunications business all throw the future of the dividend into question.

 

While more cuts to the payout don’t seem likely, it’s also not yet clear that AT&T is on a course that will allow it to begin raising its dividends again.

 

Ultimately, AT&T is a good stock to hold if you already own it and watch carefully if you don’t. The stock pays a dividend that is far above average in today’s market, and the growth seen in Q2 could be the beginning of a trend that puts the company back on the right track.

 

If free cash flow and earnings don’t fall below current expectations for the rest of the year, AT&T could be an attractive buy for income investors. Even buying today likely wouldn’t be a huge mistake, but there could be better options available if AT&T doesn’t end up in a good position to renew its dividend increases.

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