Although dividend stocks in the broad sense have been top performers of late, there have been some notable exceptions to this trend line. Over the past 12 months, for instance, shares of the telecom giant AT&T (T 0.18%) and the international shipping company Zim Integrated Shipping Services (ZIM 2.88%) have struggled mightily.
At the time of this writing, AT&T's shares have fallen by 17.7% relative to their 52-week high, while Zim's equity has dropped by a staggering 75% from its 52-week high. As a direct result, AT&T's annualized dividend yield has ballooned to approximately 6.2% at current levels. Zim's stock, on the other hand, presently offers a staggering 96.4% yield on a trailing-12-month basis (more on the mechanics of this sky-high yield later).
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Is it time to catch these falling knives? Let's dig deeper to find out.
AT&T: Cash flow concerns may be overblown
AT&T stock took a big step backward in response to its 2023 first-quarter earnings report last week. The telecom giant's shares swooned as a result of weaker-than-expected free cash flow (FCF) generation during the quarter, along with some worrying signs that its wireless customer segment is starting to slow in a big way.
Turning to the specifics, AT&T generated a mere $1 billion in FCF during the three-month period, a massive drop from the $2.8 billion the company reported in the same period a year ago. Perhaps more pressing is the fact that management previously guided for $16 billion (or more) in total FCF in 2023.
On the wireless customer front, AT&T posted a hefty 43.8% drop in new customers, compared to the first quarter of 2022. What's particularly concerning about this marked decline in new customer adds is that the wireless customer segment has been a key area of growth for the company since it sold off DirecTV in 2021.
What's the big picture? During the accompanying conference call, AT&T's management reaffirmed its view that $16 billion in FCF is still an achievable goal, citing the fact that the company's expenses peaked in the first quarter of the year. What's important to understand is that AT&T's dividend will be at risk of another reduction if the company is unable to ratchet up FCF in the back half of the year.
On the plus side of the ledger, AT&T's stock is now trading at an astonishingly low forward-looking earnings yield of 14.2%. The company's shares are thus incredibly cheap relative to a risk-free asset such as a U.S. Treasury bill. So, all things considered, the market appears to have already priced in a potential cut to the dividend -- even though management has remained resolute in its $16 billion FCF estimate for 2023.
Zim: A tough road ahead
Zim has become a popular dividend stock among retail investors due to management's decision to return a whopping 44% of the company's net income to shareholders via a quarterly distribution. This strategy proved to be a boon for shareholders in the pandemic era, thanks to elevated freight rates and sky-high demand. But Wall Street -- along with Zim's management -- expects a sharp decline in the company's earnings power in 2023 and 2024. The core reason is that both freight and bunker rates are on track to decline this year, a trend that is likely to spill over into 2024.
Zim's brain trust is forecasting a 73.4% drop in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023 relative to 2022. So with the company's dividend tied directly to its financial performance, Zim's dividend appears slated for a sharp reduction this year. Wall Street, for its part, seems to be anticipating this event, based on the stock's steady move lower over the past 12 months. The bottom line is that investors may be best served by watching this ultra-high-yield dividend stock from the safety of the sidelines for now.
