U.S. telecom company AT&T (T 1.88%) is a popular dividend stock, especially for retirees who look to the company for its utility-like stability and a generous dividend that yields a whopping 7.4% today.
But it's not all roses: AT&T recently slashed its outlook for cash profits in 2022. What's more, the stock's colossal yield might have some wondering whether the company can afford its dividend.
I've taken a fresh look at AT&T's business following this news to see what dividend investors should expect. You don't want to miss this.
Why is AT&T struggling?
AT&T's management cut expected free cash flow, a measure of a company's cash profits, for the entire 2022 year during its Q2 earnings call. While AT&T originally anticipated $16 billion in free cash flow for the 2022 fiscal year, the new number falls in the $14 billion range, a 12.5% cut.
CEO John Stankey explained that, like many other companies, AT&T is seeing inflated costs. This could be due to rising workers' wages, more expensive equipment, or some combination of these two issues. Stankey also noted that while the company expects consumers to continue paying their bills, those payments might be less timely than typical. That projection indicates that the economy is not performing as well as it has in previous quarters.
These short-term problems, combined with general caution about the economy's performance in the second half of 2022, led management to cut its free cash flow forecast. Notably, though, the company's revenue outlook stayed the same, projecting low-single-digit growth. So what's the deal?
Good signs hiding underneath the bad news
AT&T isn't alone in its struggle to digest the highest inflation in decades; many other companies are also facing this new reality of rising costs.The good news is that AT&T's actual business is doing great otherwise. The company added more than 800,000 new phone lines in the second quarter of 2022, and more than 300,000 fiber internet accounts.
Management increased its revenue guidance for its core wireless business during the full 2022 fiscal year. While the company originally anticipated 3% growth in that segment, it now calls for between 4.5% to 5% growth compared to the year prior. Meanwhile, top competitor Verizon has lost retail phone lines since 2022 started, despite guiding for between 8.5% and 9.5% revenue growth in the wireless service sector.
These two companies combine to own 75% of the wireless market in the United States, so to see such different operating results suggests that AT&T is taking business from Verizon right now. AT&T may see some short-term issues dent its financial performance, but if it can continue to add new accounts like it currently is, the business should be able to keep on track and continue to grow.
Is AT&T's dividend in trouble?
Investors likely want to know what AT&T's reduced free cash flow outlook means for its dividend. After all, dividends are cash expenses for a company, and AT&T is trying to pay down its balance sheet, not add to it by borrowing in order to fund investor income.
Fortunately, those investors can breathe a sigh of relief. AT&T has 7.169 billion shares outstanding, which means that AT&T's $1.11 per share dividend totals an annual cash expense of $7.96 billion for the business.
The resulting dividend payout ratio of 57% leaves plenty of financial breathing room to afford the payout while still paying down debt on the balance sheet. AT&T dramatically reduced the dividend during the Time Warner spinoff, which made the dividend less of a burden for the company.
In other words, that 7.4% dividend yield is no mirage. Retirees and other dividend investors can own the telecom giant with confidence.
