IS AT&T Dividend Yield Sustainable?

Recently, telecommunications giant AT&T (NYSE:T) has produced some of the largest dividend yields in the US stock market. As always, though, outsized yield raise the question of sustainability. Here’s what you need to know about AT&T’s dividend yield and whether you can expect it to remain at its current level going forward.

Upcoming Event: The WarnerMedia Spinoff

Before delving into AT&T’s dividends, it’s important to review its largest upcoming event, the spinoff of WarnerMedia.

Following its acquisition of Time Warner three years ago, AT&T has now closed a deal to spin its media branch off into an independent company.

The deal involves WarnerMedia merging with Discovery, Inc. (NASDAQ: DISCA). AT&T’s shareholders will retain 71 percent control of the new company.

In total, AT&T will receive $43 billion in combined compensation for WarnerMedia and its slate of valuable intellectual properties.

What Is AT&T Dividend Yield?

At the time of this writing, AT&T’s annual dividend was $2.08 per share, a yield of 8.93 percent.

The company’s dividend has proven to be remarkably robust over time.

AT&T has experienced 35 consecutive years in which it raised its dividend at least once without reducing it at any point.

IS AT&T Debt Too High?

AT&T’s debt-to-equity ratio currently sits around 85 percent. This debt level is well within safe ranges and shows a generally healthy management of debt within the company.

This ratio has also been trending down over the last few years from a peak of about 122 percent in 2017. Debt reduction appears to be a priority for AT&T.

In fact, the plan to spin off WarnerMedia is expected to further draw down the company’s debts. This is because the new independent company will retain some debts associated with WarnerMedia, for which AT&T was previously liable.

AT&T Dividend Payout Ratio

Based on this year’s estimates, the AT&T dividend ratio stands at 60.64 percent.

This places AT&T somewhat outside of a safe payout ratio and suggests that the dividend is likely unsustainable at its current level.

Is AT&T Cash Flow a Problem?

Free cash flow is actually one of AT&T’s stronger metrics. Projections for 2021 suggest a surplus of $11 billion on a pre-dividend flow of $26 billion.

Given this surplus, AT&T is able to continue its program of debt repayment. This extra cash flow also provides some insulation from interest rate increases, which will likely begin in 2022.

AT&T Projected Dividend Cut

While simple analysis suggests that the AT&T dividend is too high to be sustained, there’s an even better reason to believe a cut is coming in the near future. AT&T management in May outlined a plan to reduce the dividend to 40-43 percent of free cash flows from the company’s primary telecommunications business. That would translate to an approximate dividend of $1.12 per share, just over half of the current level.

Assuming a separate payout or stock split equal to $6 per share as part of the upcoming restructuring associated with the WarnerMedia spinoff, the stock would be valued at around $18.

This number assumes no further fall in stock price from its current level. With a dividend of $1.12 on shares priced at $18, the yield would drop to 6.2 percent. Even then, AT&T would still rate as a high yield stock.

What Happens to AT&T Stock if the Dividend Is Cut?

The effects of a dividend cut on AT&T’s stock will likely depend on how large that cut is. Given that the company has been fairly transparent about its intention to cut dividends, current prices already reflect investor expectations of lower future yields.

As long as the new yield is in line with the numbers the company has laid out, shares should see only mild disruption when the new dividend is formalized.

It’s important to keep in mind, though, that the market has only priced in the current expectations of future dividend cuts. As noted above, the projected dividend following next year’s spin-off will be around half of the current payout.

If AT&T makes deeper cuts to the dividend, those cuts would naturally push the stock lower. Likewise, more modest dividend cuts could trigger a slight rebound in share price.

Will AT&T Stock Go Lower?

At the moment, AT&T is likely at or near a trough. Unless investors are given new reasons to sell off, the current pricing seems unlikely to fall farther between now and when more details emerge regarding the WarnerMedia spinoff.

Future dividend guidance could also affect the price. Overall, though, there seems to be no more immediate downward pressure on shares of AT&T.

Is AT&T Stock a Buy?

AT&T currently has a buy rating, based on 19 analyst ratings from the past 3 months. The low-end target price of $26 from these ratings would be a modest gain. The average target price, however, is $29.29. The highest target price offered is $36. Even in light of reduced dividend yields in the 6 percent range, this growth potential makes AT&T a reasonable proposition.

Even for investors targeting dividend yields over growth, there’s still a good argument to be made for AT&T stock. If the yield retreats more than expected to 5 percent, it would still position AT&T above the average yield of the S&P 500.

So, while you shouldn’t expect yields of 8 percent or more to continue for very much longer, AT&T still has plenty to offer as both a blue-chip growth stock and a dividend income producer.

Overall, now could be a very good time to purchase shares of AT&T. Strong fundamentals and an adjustment toward a lower, more sustainable divided yield make the stock an attractive long-term option.

If the WarnerMedia spinoff involves a stock split, existing shareholders could also profit from shares in a new company operating in a high-growth sector.

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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.