A big reason investors buy shares of telecom giant AT&T (T 1.02%) is its dividend and long-term stability. At nearly 7%, the dividend yield is incredibly attractive, as it is more than four times the S&P 500 average of 1.6%. And with the company projecting strong free cash flow this year, AT&T might get back to raising its payouts, perhaps as early as next year.
Should investors expect a bump up to the payout in 2024, or is the telecom giant still facing too many headwinds for it to get back to growing its dividend?
AT&T's business is doing better than expected
A big concern around AT&T this year has been whether the company can afford to pay its dividend. Its free cash flow has been volatile, and with a dividend yield at more than 7% earlier this year, it was looking like the payout may be too good to be true.
But the company's latest earnings numbers helped put many of those fears to rest. For the current year, AT&T projected its free cash flow to come in at around $16 billion. In October, however, when the company posted its third-quarter numbers, it also upgraded its guidance for free cash flow, now projecting it to be around $16.5 billion.
Through the first nine months of the year, the company's revenue rose 1% to $90.4 billion. But with leaner operations, the company's operating income jumped by 10% to $18.2 billion. CEO John Stankey says the company has become more efficient, and also benefited from profitable customer relationships.
Could the dividend go higher?
Given the better-than-expected results for AT&T, it's worth asking whether a dividend hike could be in the cards. Now that the company is back to focusing on telecom (and no longer worrying about streaming since the spin off of WarnerMedia last year), the company may be in a better position to increase its dividend. Although AT&T reduced its dividend after the spin off, in the past it was a dividend growth stock.
T Dividend data by YCharts
AT&T currently pays more than $8 billion in cash dividends over a full year. Based on projected free cash flow of $16.5 billion, that means it is using 48% of free cash for dividends.
While there's some decent breathing room there, investors should remember that AT&T's initial target after the spin off was for its payout ratio, based on free cash, to be approximately 40%. Even if the company comes through on its improved guidance, it would still be far higher than its target payout ratio.
When you also consider the potential costs from the cleanup of lead-coated cables, I'm inclined to believe that management won't have an incentive to start raising dividend payments just yet, especially since the yield is still fairly high at around 6.9%.
Should you buy AT&T stock?
AT&T stock has struggled in the past, falling 26% in three years. But there is reason to be optimistic for the future, as AT&T is investing into its 5G network and expects to have 200 million people on its mid-band spectrum by the end of the year, up from 190 million as of last quarter.
Now that the company isn't in the streaming business and is back to focusing on its core operations, AT&T can get back to winning back investors as well. It could take some time, but this is a stock that should rise given its improving fundamentals.
For long-term investors, even though the dividend may not get a boost next year, now could be an optimal time to invest in the telecom stock while its value remains incredibly low. AT&T's stock trades at just 6 times its estimated future profits, and it could prove to be a steal of a deal in the future.
