AT&T (T +0.47%) currently pays a dividend that yields 6.4%. That's more than four times the S&P 500 average of around 1.5%. While it does offer a mouthwatering payout for income investors, there's the obvious concern of whether it is sustainable. And those fears may have been heightened recently after the company posted earnings results that came in below analysts' expectations.
Should investors be concerned about the safety of AT&T's dividend?
NYSE: T
Key Data Points
What AT&T's Q4 numbers told income investors
On Jan. 24, AT&T released its fourth-quarter and full-year results for 2023. For the last three months of the year, AT&T posted adjusted earnings per share (EPS) of $0.54, which not only missed analysts' expectations for $0.56 in EPS but was also lower than the company's $0.61 adjusted per-share profit in the prior-year period.
But it wasn't all bad news for AT&T investors. The telecom company did report revenue of $32 billion, which grew 2.2%. It also had 526,000 postpaid phone net additions during the quarter. And it finished the year with free cash flow of $16.8 billion, which was more than $2 billion higher than the $14.1 billion it generated in 2022.
While the company technically missed expectations based on its earnings numbers, it wasn't an awful performance by any means.
Is AT&T's dividend safe?
The key number for dividend investors to focus on with AT&T is not necessarily profit but free cash flow. That's because while payout ratios are often based on earnings, those numbers can be misleading, as accounting income includes amortization costs, which can be significant for an asset-heavy business such as AT&T. But those are also non-cash expenses.
This is why free cash flow gets a lot more attention and is often a key number management focuses on -- it knows that's what investors are going to be looking for. AT&T spends about $2 billion in cash every quarter on its dividend, or about $8 billion on an annual basis. For 2024, management is projecting that free cash flow will come in between $17 billion and $18 billion. That would leave plenty of room for AT&T to pay its dividend while still reinvesting back into its own operations. There may even be some room in there to justify a modest rate increase.
The company hasn't announced a dividend increase since it spun off WarnerMedia in 2022, which is now part of Warner Bros. Discovery, but in light of its strong results, it may not be out of the question.
Should you invest in AT&T stock?
AT&T's stock price is down 14% in the past 12 months, but as fears about the dividend subside, shares rallied recently. Now that the payout looks safer and more sustainable, the rally could continue this year, especially if interest rates come down and investors who pivot from bonds into equities begin looking for high-yielding stocks to buy.
AT&T is a good income stock to own because it's trading a dirt cheap multiple of just 7 times its estimated future profits. Now may be an excellent time to add it to your portfolio.
