AT&T remains a polarizing stock among investors. Shares of the U.S. wireless carrier have declined nearly 30% over the past decade, which is concerning for many. However, when factoring in AT&T’s famous high-yielding dividend, the overall picture improves significantly, resulting in a 50% positive return.
Dividends can have a powerful impact on investment returns, and for retirees who depend on passive income, a high dividend yield that can be relied upon is vital. A recent dividend cut usually dampens investor confidence, which is what AT&T did in early 2022. The company had spent much of the prior decade on massive mergers, including the acquisitions of DirecTV for $49 billion and Time Warner for $85 billion.
These moves to expand into media ultimately failed, leading AT&T to sell DirecTV and spin off its Time Warner assets by 2022. This left the company with over $200 billion in long-term debt. Although dividend investors dislike cuts, AT&T’s decision to cut its dividend was necessary to free up cash flow and reduce debt.
With the additional funds from spinning off Time Warner, AT&T managed to bring its long-term debt down to $132 billion. There’s still work needed, but this reduction is significant, particularly in a higher interest rate environment where restructured debt carries higher expenses. The healthier balance sheet now allows investors to focus on AT&T’s cash flows, making another dividend cut less likely even if the business faces unexpected challenges.
Think about everything you do with your smartphone: accessing the internet, streaming, staying in touch with friends and family.
Dividend sustainability vital for retirees
Most people prioritize paying their AT&T bill even during tough times, making the company a stable business with reliable profits.
AT&T’s cash flow is generally dependable, though it fluctuates based on investment in network upgrades and maintenance. Management expects AT&T to generate free cash flow between $17 billion and $18 billion this year. Given that the company spends about $2 billion on each quarterly dividend, there’s an $8 billion annual dividend expense.
This amounts to just 45% of AT&T’s cash flow, suggesting the current dividend is sustainable unless the business undergoes a severe downturn. Retirees need not worry about AT&T’s dividend. Financially, it’s on solid ground now, barring an unforeseen disaster.
As AT&T continues to pay down its debt, the dividend’s security should increase. Additionally, the company’s positive momentum in the wireless business is expected to contribute to earnings growth. Analysts project that AT&T’s earnings will grow by an annual average of 2% over the next three to five years.
This modest growth may not lead to significant stock market outperformance, but it could support occasional dividend increases. AT&T may not be a high-growth stock, but for retirees seeking a reliable high dividend yield, it remains a viable option. The company’s financial health and business stability suggest that its 5.8% dividend yield is sustainable, offering a source of dependable income.
