Is AT&T’s Dividend Safe, Sustainable, and Secure?

Due to its substantial dividend and seemingly resilient business model, telecommunications giant AT&T (T) garners plenty of interest from investors seeking a steady and reliable cash flow for their income portfolios. 

However, an above-average yield does not always mean that future payouts are guaranteed, and a dividend’s long-term viability primarily relies on a firm’s capacity to sustain a robust degree of profitability.

Nonetheless, in an industry that never sits still, companies such as AT&T must continuously innovate to maintain their fiscal well-being.

Therefore, in this article, we’ll delve into the complexities of AT&T‘s financial achievements – and examine whether its acclaimed dividend can withstand the trials of time amid a myriad of market obstacles.

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A Reassuring Second Quarter

AT&T’s latest financial report demonstrates the kind of performance expected of a company moving in the right direction. For example, the corporation disclosed an operating income of $6.4 billion, signifying a 29.3% uptick compared to the previous year’s corresponding period. 

Moreover, the company’s revenues also increased 0.90% to $29.9 billion, while adjusted EBITDA grew annually, from $10.3 billion in the second quarter of 2022 to $11.1 billion today.  

On top of that, the firm’s US postpaid phone churn was down sequentially from 0.81% to 0.79%, with consumer penetration in the fiber segment remaining flat quarter-to-quarter at roughly 38%.

Cash Flow Is King

Crucial to the ongoing delivery of any company’s dividend is simply the ability to keep paying it. In practical terms, a business must possess readily available cash reserves to finance the disbursement at the designated moment when the advantage is owed.

Fortunately for AT&T, this isn’t an immediate problem. The firm recorded a 29% increase in its cash from operations at $9.9 billion, from which it derived a free cash flow (FCF) of $4.2 billion. However, it was pleasing that its FCF was up a massive 200% year-on-year from the $1.4 billion it generated in 2022.

Interestingly, since the company has a relatively steep dividend payout ratio of 44.1%, a cash bonanza like this has given the business the breathing room needed to shore up its dividend for the long term. 

That being said, there are still grounds for prudence, as AT&T recently had to reduce its dividend following 35 consecutive years of growth. Alarmingly, it remains to be seen whether the company has adequately tackled the underlying causes that prompted this decision, including its misguided venture into the pay-TV space and its deviation from other essential offerings.

But with an expected full-year FCF of more than $16 billion, the company and its investors live to fight another day.

AT&T: A Technological Pathfinder?

To position itself as a leader with the most reliable 5G service in the country, AT&T has been vigorously expanding its 5G network.

Indeed, its mid-band 5G spectrum currently covers over 175 million people, with the company aiming to extend this to 200 million individuals by the end of the year. 

In addition to the firm’s 5G endeavors, AT&T takes pride in having the nation’s largest consumer fiber network, with its infrastructure now reaching 20.2 million sellable consumer locations. 

Looking ahead, AT&T has set its sights on surpassing 30 million fiber locations by the close of 2025 – and this growth isn’t just confined to existing territories either; the company’s joint venture with BlackRock, known as Gigapower, is a testament to this, aiming to deliver cutting-edge fiber networks to an initial set of eight new regions.

But AT&T’s vision goes beyond merely terrestrial advancements, with the business setting its gaze skyward and exploring the potential of space-based connectivity. 

For instance, in a pioneering partnership with AST SpaceMobile, AT&T achieved a monumental feat: it facilitated a direct voice call from space using a standard Samsung Galaxy S22 smartphone enabled via a satellite in low-earth orbit. 

This accomplishment isn’t just a showcase of technological prowess but marks a significant stride towards AT&T’s aspiration of offering even more comprehensive and omnipresent connectivity. Its ambition is clear: to ensure that individuals remain interconnected, irrespective of their location.

Will Debt Sink The Ship?

One of the most notable hindrances AT&T encounters is its considerable net debt load, which, as of July 26, 2023, amounted to an astonishing $132.0 billion. 

Such an immense financial obligation can constrict AT&T’s operational flexibility, potentially hampering its ability to seize new growth opportunities. While the company has plans to get this number down by around $4 billion by the end of 2023, realizing this ambition necessitates a combination of disciplined financial stewardship, consistent cash generation, and possible strategic asset sales. 

Likewise, with competitors wielding vast resources and sharing an unwavering commitment to modernization, AT&T is in a relentless pursuit to retain its existing customer base and allure new subscribers. The company’s ability to continuously refine its offerings, anticipate market trends, and deliver unparalleled service quality is paramount, where any lapse in these areas could lead to dwindling customer loyalty and a potential decline in its market position.

Wrap-Up

AT&T’s dividend has been a focal point of interest for investors due to its substantial yield and the company’s excellent history of financial performance. 

Buoyed by recent reports of a solid second quarter, its significant increase in cash flow suggests the enterprise is on a positive trajectory. 

Moreover, the firm’s aggressive expansion in its 5G network and innovative ventures into space-based connectivity further underscore its commitment to staying ahead in the sector. 

However, the shadow of an ominous debt obligation looms large, potentially limiting its operational flexibility. Additionally, the cut in AT&T‘s dividend after 35 years raises questions about the company’s ability to address the underlying issues that led to this decision. 

While AT&T has shown promising signs of ensuring its dividend’s sustainability, the hurdles it faces mean that investors should approach the stock with a mix of optimism and caution. 

In the short term, its dividend appears secure, but AT&T‘s long-term sustainability will hinge on the company’s ability to navigate its challenges and continue weaving a narrative of growth and resiliency.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.