AT&T(NYSE: T) at the moment gives a really engaging dividend. At a 5% yield, the telecom large’s payout is a number of instances larger than the S&P 500 (lower than 1.5%). Nevertheless, with that larger yield comes the next danger profile.
On a extra constructive observe, AT&T’sdividendis rising safer every quarter. That is evident within the firm’s current third-quarter earnings report, which confirmed continued enchancment in a number of key monetary metrics.
AT&T reported fairly blended third-quarter outcomes at first look. Its income ticked down 0.5% in comparison with the year-ago interval to $30.2 billion, whereas its adjusted earnings per share fell 6.3% to $0.60. Money movement from operations and free money movement additionally declined yr over yr (1% and 1.7%, respectively).
Nevertheless, there have been quite a few positives throughout the quarter. AT&T’s adjusted earnings earlier than curiosity, taxes, depreciation, and amortization (EBITDA) rose 3.4% to $11.6 billion on sturdy mobility efficiency and progress within the firm’s fiber enterprise. Its mobility providers income rose 4% to $16.5 billion, whereas shopper broadband income elevated 6.4% to $2.8 billion.
Regardless of extreme climate and a piece stoppage within the Southeast, the corporate added greater than 200,000 fiber prospects for the nineteenth straight quarter. In the meantime, it is persistently rising its mobility enterprise.
Additional, regardless that free money movement was decrease throughout the interval (at $5.1 billion), AT&T has elevated its free money movement by $2.4 billion yr to this point in comparison with the identical interval in 2023. That is enabling the corporate to repay debt. It lowered its internet debt by $1.1 billion over the previous quarter and by $2.9 billion yr over yr, serving to scale back its leverage ratio from 2.99 instances to 2.82 instances.
With its free money movement rising and its leverage ratio falling, AT&T’s high-yielding dividend is rising safer.
AT&T’s key monetary metrics ought to proceed to enhance within the coming quarters. The expansion within the firm’s mobility and fiber companies ought to improve its earnings and money movement, enabling the corporate to scale back its leverage ratio because it repays further debt.
The corporate expects its leverage ratio to achieve its goal within the 2.5 instances vary within the first half of subsequent yr. That might put it across the present degree of chief rival Verizon(NYSE: VZ), which has lowered its leverage ratio from 2.6 instances to 2.5 instances over the previous yr. Verizon is at the moment on monitor to get its leverage ratio right down to round 2.3 instances by the top of subsequent yr.
Nevertheless, its leverage ratio will rise after it closes its $20 billion all-cash deal for Frontier Communications, a transfer it is making to higher compete in opposition to AT&T in fiber. That may possible be a short lived blip as Verizon’s leverage ought to decline inside two years of closing that deal.
Whereas Verizon’s leverage ratio will begin rising sooner or later, AT&T’s ought to proceed to fall. The corporate lately agreed to promote its remaining 70% stake in DIRECTV to its three way partnership associate. It expects to obtain $7.6 billion in money funds over the subsequent few years, which it plans to make use of to strengthen its steadiness sheet additional.
With further steadiness sheet enhancements forward, AT&T would possibly lastly be within the place to start out growing its dividend once more. The telecom large reset its payout in 2022, chopping it by almost 50% following the spin-off of its former media division to create Warner Bros. Discovery. It lowered its dividend to retain more money to develop its fiber and mobility companies and scale back debt.
With that technique now paying off, the corporate might be able to start returning more money to shareholders by way of dividend will increase and share repurchases. It has fallen properly behind Verizon on the dividend lately, given its rival’s continued will increase (18 straight years). Verizon at the moment gives a 6.5%-yielding payout backed by stronger and enhancing monetary metrics.
AT&T’s technique is working. CEO John Stankey acknowledged within the third-quarter earnings report, “We’re investing on the high of the trade, decreasing debt and rising free money movement yr to this point.” That offers the corporate rising confidence in its means to proceed delivering enhancing outcomes.
It is also placing the corporate’s high-yielding dividend on a firmer basis. Whereas AT&T does lag behind rival Verizon in some areas necessary to dividend buyers, it might catch up within the coming years. Within the meantime, it is turning into a a lot safer possibility for these searching for a steady earnings stream.
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Matt DiLallo has positions in Verizon Communications. The Motley Idiot has positions in and recommends Warner Bros. Discovery. The Motley Idiot recommends Verizon Communications. The Motley Idiot has a disclosure coverage.
