Before the pandemic disrupted its operations, AT&T (T 3.40%) was a reliable dividend stock. Not only that, but it was also a dividend-growth stock. For decades, the company increased dividend payments, and in 2019, its streak hit 36 consecutive years of quarterly dividend hikes. When the pandemic hit, the company kept its dividend intact but it did not make any increases to the payout.
Then, after it spun off WarnerMedia in 2022 it adjusted (reduced) its payout to be more stainable. But the company hasn't raised its dividend since then, even though its operations appear more stable and consistent. Now that the company's results look even stronger in 2024, could a dividend hike finally be in the cards?
AT&T's free cash flow continues to expand
An important number for dividend investors to consider when looking at income stocks is free cash flow (FCF). This represents the operating cash flow that a company has left over after making capital purchases. A company that pays a dividend needs strong free cash flow to ensure it can balance its growth initiatives and dividend without worrying about raising additional funds.
Last year, AT&T's free cash flow totaled $16.8 billion, which came in slightly higher than the company's expectations. For 2024, the telecom giant expects free cash to be even higher, in a range of $17 billion to $18 billion.
On an annual basis, the company pays out approximately $8.2 billion in dividends. That means if AT&T hits the top end of its guidance for free cash flow this year, it might end up paying just 46% of its free cash as dividends. That's not only sustainable, but also leaves plenty of room for the company to potentially raise its current quarterly dividend of $0.2775.
Could a dividend hike happen this year?
Business is going well for AT&T right now as the company expects wireless service revenue to grow by around 3% this year and broadband revenue to increase by at least 7%. It seems likely that from a financial point of view, AT&T can justify making a dividend increase.
But I don't think the company is in any rush to make one. For starters, the telecom stock already pays a dividend that yields 6.5% -- more than four times higher than the S&P 500 average of 1.5%. Investors can already get a great yield with AT&T's stock right now so there may not be a big need to raise the dividend just yet.
Second, there isn't a lot of excitement around telecom and dividend stocks as a whole. With interest rates remaining high, investors have more ways of generating recurring cash flow than by just buying dividend stocks, which are often riskier options than bonds, for example.
Since the start of 2022 (when interest rates began to rise), the iShares U.S. Telecommunications ETF has declined by 34%. If AT&T announces that it's going to start raising its dividend again right now, it may not get much attention. It might be better if the company waited for interest rates to come down, so dividend stocks would be in the limelight again.
Historically, AT&T has announced dividend increases toward the end of the year. If it does so this year, there may be an interest rate cut or two by then and dividend stocks could be rallying. In that case, AT&T's yield may start to shrink. Should that happen, I believe AT&T could announce a rate hike by December.
Should you buy AT&T's stock today?
If you're a dividend investor looking for a good payout, AT&T can be a great stock to buy right now. Odds are, the stock will start rallying once interest rates come down, and buying shares of AT&T before that happens could help you secure better returns.
Even if the dividend doesn't go up this year, it may only be a matter of time before it does. The company's strong financials make it probable that AT&T will begin to increase its payout again, but it may be picking the right time to do so. Now that the company is no longer involved in the streaming business, its financials are in much better shape and the business should make for a solid long-term investment.
