US wireless carrier AT&T (NYSE: T) recently closed its 2023 fiscal year with profits. The company, popular with income-focused investors, received some great news about its financials and how they could affect its dividend going forward.
It wasn’t all sunshine, however. The company is deficient in one key area that could limit the upside potential of the stock’s total return. AT&T remains a somewhat controversial stock that may or may not fit into your portfolio.
The good news for dividend investors
AT&T is one of the few companies that dominate the wireless communications market in the United States. The company has been around for ages because communication is an integral part of our daily lives. While business has shifted primarily from landlines to cell phones, the same companies still build and maintain the networks.
It’s a household name for dividend investors because it’s traditionally paid a generous dividend that yields over 6% at today’s share price. For some folks, like retirees or those approaching retirement, the dividend is everything. For them, earnings were a positive. That’s because management guided for between $17 billion and $18 billion in free cash flow for this year.
Remember that dividends are a cash expense for a company. The safest dividend is the one a company can pay directly from its cash profits. AT&T’s dividends currently cost the company about $2 billion per quarter, or $8 billion per year. As you can see, AT&T has a lot of financial headroom if the company comes close to achieving management’s forecasted cash flow.
Free cash flow is counted after a company makes capital investments, so this number already takes into account the money AT&T invests in maintaining and building its networks. Dividend investors can be reasonably confident that their dividends will continue to flow uninterrupted.
Where AT&T might lose your interest
Everyone has different investment goals, which means a dividend isn’t enough for many others. These people may not like what they are about to read. While AT&T’s cash flow looks healthy, management expected a profit that was well below analysts’ expectations. Management’s forecast of $2.15 to $2.25 per share was well below the $2.47 expected by analysts.
Management cited several factors that will weigh on earnings in 2024, but this lack of earnings growth has been the stock’s Achilles’ heel for some time. The company earned $2.51 per share in 2014, exceeding management’s 2024 forecast!
It’s hard to get excited for now.
Telecom isn’t a very high-growth industry in the United States, where the population is growing slowly, and almost everyone has a cellphone by now. Companies must operate efficiently in a mature industry to create value, and AT&T hasn’t done that. It’s still paying down a massive debt from its failed entertainment acquisitions earlier this decade.
Speaking of debt, management expects to be able to reduce AT&T’s leverage to 2.5 times net debt (total debt less cash) compared to EBITDA by the first half of 2025. It also expects earnings growth in 2025, but how much is a huge question mark. It’s hard to get excited about AT&T’s total return potential just yet, at least not until investors know what growth they can expect over the next year and beyond. Until then, it’s hard to call the stock a bargain, even if it’s only worth eight times next year’s earnings.