Shares of AT&T (NYSE:T) are down more than 25% from their 52-week high. Concerns about the telecom giant’s free cash flow weigh heavily on the telecom giant’s shares. That has raised some concerns that the company may not be able to maintain its high dividend, which now yields more than 7% after the share price decline.
However, dividend investors can breathe a little easier after AT&T’s CFO recently said the company is on track to achieve its goals free cash flow guidance for the year. That suggests the dividend won’t be cut again in the near term. However, that doesn’t mean income-oriented investors should rush and buy their stocks.
AT&T’s CFO Pascal Desroches recently confirmed that the company would generate between $4.5 billion and $5 billion in free cash flow in the third quarter. That gave the CFO the confidence to reiterate the company’s expectation that it would generate at least $16 billion in free cash flow this year.
It would give the telecom giant the cash to fund its dividend and get back on track with deleveraging its balance sheet:
As this slide shows, net debt hasn’t fallen over the past year, despite generating more than $15.2 billion in free cash flow. However, that should change in the coming months. AT&T expects to produce $11 billion in cash in the second half of 2023, leaving more than $4 billion left after paying dividends and other costs. That would help stimulate it leverage ratio towards 3.0 by the end of the year. Meanwhile, the country expects its debt ratio to improve to 2.5 by 2025 as it continues to produce excess free cash to pay down debt.
Far behind its rival
While that’s an improvement, AT&T has a higher leverage ratio than AT&T’s Verizon (NYSE: VZ). The rival’s leverage ratio had already fallen to 2.6 at the end of the second quarter (an improvement from 2.7 a year ago). Verizon’s long-term goal is to achieve leverage between 1.75 and 2.0. However, the intention is to resume buy back shares once it falls below 2.25, which would delay deleveraging. Verizon’s lower and improving leverage ratio recently gave the company the confidence to increase its dividend by another 1.9%, its 17th straight year of dividend growth.
AT&T’s increased leverage ratio is one of the factors that led it to cut its dividend by nearly half last year spinoff and merger of his media company to create Warner Bros. Discovery. That reduction allowed AT&T to retain more money to reinvest in its operations and for debt reduction.
There was some concern that the company would have to cut payouts again to accelerate debt reduction. That seems less likely now that the improvement in free cash flow in the second half of the year is coming about as expected. So AT&T’s high-yield dividend appears safe and should become safer in the coming quarters as its debt burden decreases.
However, the company likely won’t be in a position to join rival Verizon and raise its dividend anytime soon. The company would likely only consider a dividend increase after it reaches its target of 2.5 in 2025.
Not the best high-yield telecom stock
AT&T’s main draw these days is its high-yield dividend. While there have been some concerns about its sustainability, these concerns should disappear as the company’s free cash flow and leverage ratio improve. It therefore seems likely that AT&T will maintain its dividend in the coming quarters. That could make it look like a potentially attractive option for those looking for a fixed-income stream with a higher yield than most bonds.
However, the payout isn’t as attractive as Verizon’s. Its rival offers an even higher-yielding dividend (currently 7.8% versus 7.4% for AT&T) that should continue to rise at a modest pace in the coming years. That dividend also seems safer, given Verizon’s lower leverage ratio and improving free cash flow profile. Verizon generally seems like the better choice for income-seeking investors these days.
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Matthew DiLallo holds positions at Verizon Communications. The Motley Fool recommends Verizon Communications and Warner Bros. Discovery on. The Motley Fool has a disclosure policy.
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