AT&T's 5%-Yielding Dividend Continues to Grow Safer

AT&T (T -1.67%) currently offers a very attractive dividend. At a 5% yield, the telecom giant’s payout is several times higher than the S&P 500 (less than 1.5%). However, with that higher yield comes a higher risk profile.

On a more positive note, AT&T’s dividend is growing safer each quarter. That’s evident in the company’s recent third-quarter earnings report, which showed continued improvement in several key financial metrics.

Improvement where it mattered most

AT&T reported rather mixed third-quarter results at first glance. Its revenue ticked down 0.5% compared to the year-ago period to $30.2 billion, while its adjusted earnings per share fell 6.3% to $0.60. Cash flow from operations and free cash flow also declined year over year (1% and 1.7%, respectively).

However, there were a number of positives during the quarter. AT&T’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 3.4% to $11.6 billion on strong mobility performance and growth in the company’s fiber business. Its mobility services revenue rose 4% to $16.5 billion, while consumer broadband revenue increased 6.4% to $2.8 billion.

Despite severe weather and a work stoppage in the Southeast, the company added more than 200,000 fiber customers for the 19th straight quarter. Meanwhile, it’s consistently growing its mobility business.

Further, even though free cash flow was lower during the period (at $5.1 billion), AT&T has increased its free cash flow by $2.4 billion year to date compared to the same period in 2023. That’s enabling the company to repay debt. It reduced its net debt by $1.1 billion over the past quarter and by $2.9 billion year over year, helping reduce its leverage ratio from 2.99 times to 2.82 times.

With its free cash flow rising and its leverage ratio falling, AT&T’s high-yielding dividend is growing safer.

More improvements ahead

AT&T’s key financial metrics should continue to improve in the coming quarters. The growth in the company’s mobility and fiber businesses should increase its earnings and cash flow, enabling the company to reduce its leverage ratio as it repays additional debt.

The company expects its leverage ratio to reach its target in the 2.5 times range in the first half of next year. That would put it around the current level of chief rival Verizon (VZ -1.15%), which has lowered its leverage ratio from 2.6 times to 2.5 times over the past year. Verizon is currently on track to get its leverage ratio down to around 2.3 times by the end of next year.

However, its leverage ratio will rise after it closes its $20 billion all-cash deal for Frontier Communications, a move it’s making to better compete against AT&T in fiber. That will likely be a temporary blip as Verizon’s leverage should decline within two years of closing that deal.

While Verizon’s leverage ratio will start rising in the future, AT&T’s should continue to fall. The company recently agreed to sell its remaining 70% stake in DIRECTV to its joint venture partner. It expects to receive $7.6 billion in cash payments over the next few years, which it plans to use to strengthen its balance sheet further.

With additional balance sheet improvements ahead, AT&T might finally be in the position to start increasing its dividend again. The telecom giant reset its payout in 2022, cutting it by nearly 50% following the spin-off of its former media division to create Warner Bros. Discovery. It reduced its dividend to retain more cash to grow its fiber and mobility businesses and reduce debt.

With that strategy now paying off, the company could be in a position to begin returning more cash to shareholders through dividend increases and share repurchases. It has fallen well behind Verizon on the dividend in recent years, given its rival’s continued increases (18 straight years). Verizon currently offers a 6.5%-yielding payout backed by stronger and improving financial metrics.

AT&T’s dividend is looking a lot safer

AT&T’s strategy is working. CEO John Stankey stated in the third-quarter earnings report, “We are investing at the top of the industry, reducing debt and growing free cash flow year to date.” That gives the company growing confidence in its ability to continue delivering improving results.

It’s also putting the company’s high-yielding dividend on a firmer foundation. While AT&T does lag behind rival Verizon in some areas important to dividend investors, it could catch up in the coming years. In the meantime, it’s becoming a much safer option for those seeking a stable income stream.