Shares of AT&T (T 0.18%) recently slipped about half a percentage point in response to first-quarter results that the telecom giant announced before the market opened on April 24.
First-quarter results exceeded Wall Street's expectations, and the company's 5G infrastructure attracted new customers and retained old ones better than its peers. It wasn't a quarterly report to write home about, but the company's ultra-high-yield dividend looks like it's on steady ground.
Before you rush out and fill your retirement account with AT&T shares, you should also know that this company slashed its dividend payout by 46% over two years ago. First-quarter results were encouraging, but management still hasn't told investors when it can begin raising its dividend payout again.
Is this ultra-high-yield telecommunications stock a smart buy now? Below, I'll highlight some strengths against the company's weaknesses to see if adding it to your portfolio makes sense.
Reasons to buy AT&T now
AT&T chopped its dividend nearly in half after spinning off its unpredictable media assets. Now that it's purely a telecommunications business, cash flow could be more reliable.
Shares of AT&T offer an eye-popping 6.7% yield at recent prices. It also looks like the quarterly dividend is well-supported by rising profits.
Over the past year, AT&T needed less than two-fifths of the free cash flow its operations generated to meet its dividend obligation. Management expects free cash flow to rise from $16.8 billion in 2023 to a range between $17 billion and $18 billion this year.
For years, AT&T invested heavily in 5G towers and fiber-optic cables, and those investments are paying off. In the first quarter, mobility service revenue rose 3.3% year over year. Thanks to the continued uptake of fiber internet services and the strong launch of a new fixed wireless service, total broadband subscribers are on the rise again. The company reported 54,000 net consumer broadband additions over the past 12 months.
By revenue, AT&T is the second-largest member of America's three-way telecommunications oligopoly and could soon be the largest. In 2023, it led Verizon and T-Mobile US in non-equipment wireless revenue growth. It also reported a lower percentage of subscribers discontinuing service than its peers in 11 out of the past 13 quarters.
Reasons to remain cautious
AT&T's 5G network didn't build itself. The company invested heavily and is still servicing an enormous debt.
The company formerly known as Ma Bell finished March with $128.7 billion in net debt. That's about $6 billion less than it had a year earlier. At the end of March, the telecom giant's net debt pile equaled 2.9 times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
AT&T says it's on track to shrink its debt-to-EBITDA ratio to 2.5 in the first half of 2025. Increasing revenue from new mobility services and broadband subscribers could allow the company to meet its debt-reduction goal. This stock offers a high yield now, but the company probably won't begin raising its payout again until after its debt-to-EBITDA ratio hits its stated goal.
AT&T's debt-reduction plans probably won't receive any assistance from a lower-interest-rate environment, at least in the near term. Late last year, the Federal Reserve alluded to a handful of upcoming interest-rate cuts. Unfortunately, stubbornly strong inflation figures suggest those rate cuts are further away than hoped.
A buy now?
A leading 5G network wasn't cheap to build but is probably going to pay off for the telecom's shareholders. Traditional wireline broadband subscribers leaving AT&T for other providers is a much smaller problem now that the company can offer a fixed wireless solution to customers who aren't located near fiber-optic cables.
AT&T has steadily growing mobility service revenue and broadband sales that are rising even faster. Investors can reasonably expect increasing profits from the company for at least the next 10 years.
It might take another year or two of debt reduction before this stock's dividend payout starts rising again. If that's something you can live with, however, adding some shares of AT&T to a diversified portfolio right now looks like a smart move.
