U.S. wireless carrier AT&T (T +0.47%) is a polarizing stock among investors. Shares are down nearly 30% in price over the past decade, which is a tough pill to swallow. However, include AT&T's famous high-yielding dividend and shares generated a 50% positive return.
Indeed, dividends can have a powerful impact on investment returns.
Moreso than returns, retirees depend on dividends for the passive income they offer, which can help pay living expenses. For those investors, a high dividend yield they can trust to continue coming quarter after quarter matters above all.
So, can you trust AT&T's 5.8% yield?
AT&T cut its dividend in 2022
A company recently cutting its dividend probably doesn't instill confidence, but that's precisely what AT&T did in early 2022. The telecom company squandered much of the past decade on massive mergers to acquire DirecTV ($49 billion) and Time Warner ($85 billion) to expand into media. This was ultimately a failure, causing AT&T to sell DirecTV and spin off its Time Warner assets by 2022, leaving the company with over $200 billion in long-term debt.
Dividend investors hate seeing dividend cuts, but cutting the dividend was admittedly necessary. Cutting the dividend freed up cash flow to help pay down debt. With a cash infusion from spinning off Time Warner, AT&T reduced its long-term debt to $132 billion. There's more work ahead, but that's a massive relief, especially in a higher rate environment where any restructured debt will carry higher interest expenses.
The balance sheet is in far better shape now, enabling investors to focus on AT&T's cash flows to help determine the safety of its dividend. A healthier balance sheet means less risk of another cut if the business suffers an unexpected downturn. In other words, the cut has arguably made the dividend safer today.
Can AT&T's cash flows support its dividend?
Just think about all the things you do on your smartphone. You access the internet, stream, and stay in touch with friends and family. Most people will pay their AT&T bill over many others, even during hard times. That makes AT&T a steady business with reliable profits. AT&T's cash flow is dependable, fluctuating primarily due to how much the company invests in upgrading and maintaining its network.
NYSE: T
Key Data Points
AT&T's free cash flow is its discretionary cash profits left after investing in the business. Management expects AT&T to generate free cash flow between $17 billion and $18 billion this year. The company spends approximately $2 billion on each quarterly dividend, meaning there is an $8 billion annual dividend expense. That's just 45% of AT&T's cash flow this year. AT&T's business would have to fall on its face for cash profits to fall enough for the company not to cover its dividend with cash.
Never say never, but it's hard to imagine AT&T's telecom business collapsing like that. Business is thriving. The company added 349,000 net additions to its wireless business in Q1 and believes its 0.72% churn rate (how many customers leave) is the industry's best.
The dividend is healthy and the future is bright
Retirees shouldn't worry about AT&T's dividend. It's on rock-solid financial ground now, barring an unforeseen disaster. AT&T's dividend should only become increasingly secure as the company continues to pay down debt in the coming years.
Plus, its momentum in the wireless business should translate to earnings growth. Analysts estimate that AT&T will grow earnings by an annual average of 2% over the next three to five years. That won't rock your world, but it's enough to eke out occasional dividend raises without impacting the payout ratio.
I wouldn't bet the farm that AT&T will outperform the broader stock market anytime soon, but retirees looking for a high dividend yield they can count on should look no further.
