AT&T (T -1.19%) offers a high dividend yield of 6.3%. But the business isn't in great shape, with the company's financials showing signs of weakness in the latest quarter. This isn't new territory for the company; there were doubts about the dividend before it spun off WarnerMedia, which is now part of Warner Bros. Discovery. And even though it has adjusted its dividend payments since the spinoff, investors may be worried that another adjustment to the dividend may be necessary.
The company's free cash flow dipped significantly in Q1
Free cash flow is what is left of a company's operating cash flow after factoring in capital expenditures. It's an important figure for dividend stocks because it tells investors how much cash is effectively available to pay dividends from its day-to-day operations.
Suppose a company isn't generating sufficient free cash flow to pay the dividend. In that case, it may need to dip into its existing cash balance or potentially raise money just to maintain the payout. If the situation persists, it can put the company's dividend in jeopardy. That is the problem that computer company Intel ran into and why it ended up having to slash its dividend payments by 65% earlier this year.
In AT&T's first-quarter results for 2023 (the period ended March 31), the telecom company reported free cash flow of $1 billion for the first three months of the year. That's problematic because AT&T's dividend pays a cash dividend of just over $2 billion every quarter. Cash flow will fluctuate over time, so one period where free cash flow was less than the amount of dividends paid isn't necessarily a huge problem, but it can be if things don't improve. Here's how the company's free cash flow has looked over the last four quarters:
| Period | Free Cash Flow |
|---|---|
| Q1 2023 | $1.0 billion |
| Q4 2022 | $6.1 billion |
| Q3 2022 | $3.8 billion |
| Q2 2022 |
$1.4 billion |
Source: Company filings. Table by author.
Guidance remains unchanged
AT&T's 2023 guidance called for free cash flow of $16 billion, which would be a $2 billion improvement from 2022. If it achieved that, AT&T's free cash would be double the rate of its dividend, which over the course of a full year would cost the company $8 billion. The positive is that there's room for AT&T to miss its guidance and for free cash flow to still be high enough to support the dividend.
CEO John Stankey, however, did not suggest that there were signs of trouble with the forecast, stating in the press release announcing the recent earnings results that "we remain confident in our full-year guidance."
The business operations don't show signs of trouble
It has been a little over a year since AT&T spun off WarnerMedia, and during that time, the telecom company's financials have been moving in the right direction and, if nothing else, have been relatively stable:
T Revenue (Quarterly) data by YCharts.
If a company's revenue and operating income are in good shape, that bodes well for the dividend and cash flow. Given the company hasn't seen a sharp decline in revenue or profitability, I'd say that there isn't a huge reason for investors to be worried about the business at this point.
Should you buy AT&T stock?
At 6.3%, AT&T does offer a fairly high dividend yield, which is more than three times the S&P 500 average of 1.7%. The stock is also trading at a fairly low forward price-to-earnings multiple of seven (the S&P average is 19).
Telecom businesses generally are pretty stable, and while they may trade customers back and forth with competitors, their financials should benefit from a fairly consistent stream of recurring revenue, and that appears to be the case with AT&T as the business doesn't look to be in trouble. Although free cash flow was low last quarter, that's not enough of a reason to say that the dividend is due for a cut. AT&T still makes for a good dividend stock to buy right now.
