One of the hallmarks of a diversified portfolio is the inclusion of some dividend stocks. Luckily for investors, there are plenty of dividend-paying companies out there to choose from. They operate in different sectors and generate enough free cash flow to consistently reward shareholders.
One such company is telecommunications provider AT&T (T 1.02%). While AT&T faces intense competition from other telcos, perhaps bigger concerns linger around the company's high level of debt on the balance sheet. After cutting its dividend nearly in half in 2022, I think AT&T has shown some signs of improving liquidity. But unfortunately for shareholders, many have soured on the stock and sent it to near 30-year lows.
I see the stock as a bargain right now that can supplement your portfolio with some dividend income. Let's explore why.
AT&T stock is historically cheap
The chart below shows that AT&T's stock price is trading far below its 30-year average. While this might not exactly give potential investors the highest degree of confidence, could it be that AT&T's valuation is overly depressed?
In an otherwise commoditized telecommunications landscape, AT&T has found ways to reignite subscriber growth across its 5G and fiber operations. This has led to increasing revenue, and more importantly, a steadily declining debt load.
As of the third quarter, ended Sept. 30, AT&T's total debt was $138 billion -- down from $143 billion at the end of Q2. This is important because if the company fails to generate the necessary cash flow to reduce its debt obligations, it could result in a default. This would likely send the stock spiraling even farther down and seriously question AT&T's future.
Through the first nine months of 2023, AT&T generated $10.3 billion in free cash flow -- up 29% year over year. Moreover, per management's latest guidance, the company is forecast to grow its free cash flow by roughly 17% for all of 2023 should it meet its target of $16.5 billion. The company is consistently using this excess cash to pay down debt and fund its attractive dividend.
Since September 2022, AT&T has paid out roughly $10 billion in dividends. But given the company's cash flow generation, you might think AT&T has excess funds to reward shareholders even further. However, during the company's Q3 earnings call, CEO John Stankey stated that AT&T remains "committed to our dividend payout level and expect[s] its credit quality to consistently improve."
Leadership is making it clear that the company's top priority is reducing its debt obligations. While a dividend raise would be nice, I'd encourage investors to think more about the sustainability of AT&T's dividend, which I think looks safe given management's commentary.
Keep an eye on the dividend
T Dividend data by YCharts
The chart above illustrates AT&T's historical dividend trend. The glaring blemish in this chart is the hefty cut that AT&T's dividend took in early 2022. After it became obvious that AT&T's expansion efforts in media were not working out, AT&T bit the bullet and spun off non-core assets, including WarnerMedia (which merged with Discovery to become Warner Bros. Discovery) and DirecTV. AT&T's failed efforts to become a player in media and entertainment worried investors who thought the company was losing sight of its core network business.
Investors are now waiting to see if the company can get back on track in the 5G and fiber communications operation. This plan appears to be working, albeit slowly. AT&T only grew its top line by 1% year over year during the third quarter. It's not exciting growth, but it's a much better profile than top competitor Verizon Communications -- which is seeing shrinking revenue year over year.
At a forward price-to-earnings (P/E) multiple of just 7.1, AT&T stock is trading at a steep discount to the S&P 500 -- which has a forward P/E of 21.7. With such negative sentiment surrounding the company's perception and only minimal signs of growth prospects, investors should not view AT&T as a monster growth stock by any means. However, with shares trading at their lowest levels in decades and the now more stable dividend yielding nearly 7%, buying the dip looks tempting.
