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AT&T: Still an attractive dividend play?

AT&T’s shares will go ex-dividend today.

That means that shareholders who had bought into this stock prior to October 6th will be entitled to get a dividend payout from the company due November 1st.

The declared quarterly dividend is $0.2775 per common share, which offers a dividend yield of almost 6.97% based on the latest closing price.

That 6.97% dividend yield offered by AT&T is almost double that of:

  • 3.65% – industry average yields
  • 3.74% – yields on 10-year US Treasuries, which are widely considered as “risk-free”

 

AT&T’s dividend play dampened by cash flow constraints

Over the years, the world's largest telecommunications company has been consistently paying dividends to its shareholders, and has been a mainstay among investors looking to generate extra cash income.

Up until last year, AT&T had been steadily increasing its dividends, even reaching $0.52 in its February 2022 payout.

However, that figure has been just about halved down to the $0.2775 that’s about to be paid for the upcoming dividend.

That massive drop in dividends was due to the decline in the company’s free cash flow, after AT&T sold off its entertainment unit, WarnerMedia, earlier this year.

 

And there’s set to be more cash-flow woes ahead.

During its previous quarterly earnings announcement back in July, AT&T had already lowered its free cash flow forecast for 2022 from US$16 billion down to US$ 14 billion.

AT&T CEO, John Stankey, warned that customers have been slow in paying their phone bills as US consumers battle with multi-decade high inflation.

Additionally, AT&T is also the biggest non-financial corporate borrower in the world.

To be fair, the company has used proceeds from the WarnerMedia sale to pare down its total debt, which stood at US$132 billion as of Q2 2022.

But while the company goes about paring down its debt, the funds used for such ambitions are then taking away from the dividend pot.

 

AT&T trading around 20-year low

To illustrate how important dividends are to AT&T’s stock price performance, consider how this stock suffered a massive gap down on July 21st.

That was the stock’s biggest drop in 20 years, the day AT&T lowered its 2022 free cash flow forecast.

And with the stock currently languishing around its lowest levels since 2003, its tough to make a bullish case for AT&T, even without the supressed dividend payments.

Investors with greater risk appetite may consider the potential growth contained within AT&T’s push into the 5G and its growing fibre network, but will have to look past present-day headwinds buffeting US consumers.

Still, with the dividend yields still elevated compared to industry peers, that’s enough to have more than half (53%) of the analysts surveyed by Bloomberg to maintain a ‘Hold’ call on this stock for now.

AT&T trading around 20-year low

 

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