AT&T's Dividend: The Impact Of Eliminating It Altogether

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After a bombshell dividend cut from 1 of our halfway semipermanent holdings successful Intel Corporation (INTC), we person started to return a look astatine our semipermanent holdings wherever dividends person been rumored to be astatine risk. This is abstracted from our much short and medium-term trading guidance. Remember, your trading goals should beryllium to make other rate travel to provender a longer-term halfway portfolio that has dividend growth. That is thing that we guideline connected for our membership.

While we thatch trading, we preach investing. With that said, we coming move our attraction to a sanction that we person agelong been exposed to complete nan years successful immoderate capacity. Only for a little play was AT&T Inc. (NYSE:T) swapped retired of our halfway holdings erstwhile it proceeded to autumn 30% during nan debacle of nan DIRECTV offloading and nan spinoff of Warner assets. The existent "legacy" type AT&T inc. continues to beryllium a sanction we own, 1 that is leaner, and seemingly has a guidance squad that is yet cognizant of nan truth that it has destroyed shareholder wealthiness complete nan years. We person liked buying nan caller AT&T successful nan $16-$18 range, mostly speaking, but this is wholly reliant connected nan truth that a bountiful 6% positive dividend yield is being offered astatine those levels.

Take a look astatine nan study conception of AT&T connected Seeking Alpha. There are tons of awesome sentiment and study pieces some bullish and bearish. Some of them talk astir nan dividend. It has agelong been our sentiment that nan dividend is nan sole logic to ain this stock. Collect it for income, aliases reinvest nan dividends for semipermanent compound gains to build a position and past unrecorded disconnected of nan dividends successful retirement. Only recently, erstwhile nan banal deed nan mid-teens did immoderate superior maturation look possible. But if nan dividend were to beryllium trim hard, and location are morganatic arguments to beryllium made for why that whitethorn beryllium a positive, we deliberation shareholders would fly and nan banal could autumn arsenic acold arsenic nan single-digits. This is because it is owned successful ample portion by income investors.

The number 1 consequence to nan dividend? It is nan debt. Simple arsenic that. Overall, nan dividend, arsenic it presently is paid retired of rate flow, is safe. This is simply a acold outcry from Intel, whose rate flows were turning antagonistic and nan institution was losing money. While AT&T whitethorn beryllium a dinosaur that grows astatine a snail's pace, it is not losing money. And we will add, that wireless connectivity is alternatively recession-resilient successful our opinion, because group do not want to suffer their connectivity.

So we person opined that nan debt is nan number 1 consequence to nan dividend. An statement tin beryllium made that cutting nan dividend tin prevention billions of dollars that would spell to shareholders, and could beryllium applied to nan monolithic main balances of debt. Make nary mistake, this precocious indebtedness load successful a clip of rising liking rates, and liking rates that will beryllium "higher for longer," intends nan company's refinancing efforts aliases caller indebtedness taken connected will travel astatine higher liking expense, hurting nan bottommost line.

Members, this is simply a existent problem. This indebtedness load is 1 of nan biggest risks not conscionable to nan dividend, but to AT&T banal successful general. To management's credit, it has been improving nan balance sheet. Management has been trading disconnected assets and paying down its debt. Just this week we learned that nan institution is exploring yet different sale, this clip of its cybersecurity business, an area that is reddish basking correct now. When nan institution reported earnings a fewer weeks agone we saw that astatine 4th extremity nan nett indebtedness was $132.2 billion. That is still a beautiful precocious leverage base, arsenic nett debt-to-adjusted EBITDA was conscionable nether 3.2X. That said, AT&T trim its nett indebtedness by $24 cardinal successful 2022 done each of nan divestitures and plus sales, and it's looking to trim different $30 positive cardinal by 2025, targeting astir $100 cardinal successful nett debt, taking leverage nether 3X.

If nan dividend were eliminated, successful theory, AT&T could destruct its indebtedness successful little than a decade. Why do we opportunity this? Well, successful Q4 dividends paid were $2.01 billion. So that intends connected an yearly ground nan institution is paying retired $8 billion. So complete 10 years that is $80 billion, roughly. Plus nan institution is already making main and liking payments, and is still trading disconnected assets. Based connected nan astir caller indebtedness balance, AT&T could salary disconnected each indebtedness successful little than a decade if it did this. While an statement tin beryllium made for a cut, it is our presumption that nan dividend will beryllium held firm, moreover though location is really room for a dividend increase. Yes, a dividend increase. We are not saying an summation is successful nan cards, and we really do for illustration indebtedness to beryllium addressed while keeping nan dividend firm.

Why do we opportunity location is room for an increase? Well, historically nan institution aimed for a 70% payout ratio, that is, nan ratio of dividend paid from free rate flow. We saw a free rate travel dip successful 2022, but nan vessel is being righted. In Q4, location were $31.3 cardinal successful revenues. Operating expenses were $25.6 billion. Operating income grew $700 cardinal to $5.7 cardinal compared to past year. But it comes down to free rate flow. Free rate travel has been much than capable to screen nan dividend, though nan payout ratio for nan twelvemonth 2022 was a concern. But successful Q4, it was good covered.

Cash from operating activities was $10.3 billion, and capex spending from nan institution was a small complete $4.1 billion. Q4 free rate travel was $6.1 billion. As we mentioned supra dividends paid were $2.01 billion. That near astir $4.1 cardinal successful free rate travel aft nan dividend was paid. Doing nan mathematics nan Q4 dividend payout ratio from free rate flow. was a secure 33.0%. Despite immoderate unsmooth quarters successful early 2022, nan payout ratio for nan twelvemonth was astir that 70% mark.

As we look to 2023, and beyond, we each cognize that indebtedness needs to beryllium paid down. A dividend elimination successful theory, successful conjunction pinch ongoing indebtedness servicing and much plus sales, could lead to a debt-free AT&T successful decade. A dividend trim could widen this clip statement but could let excess free rate travel to beryllium utilized for debt. How overmuch free rate travel are we talking? Well, we spot free rate travel of $14.5-$16.75 billion. The little extremity assumes a mean recession successful 2023 and nan higher extremity prices successful a soft landing. We spot gross increasing 3%-6% pinch much customer adds a pricing power.

A bearish statement could beryllium made that location is stiff title and promotions will erode margins, but caller information disagrees. We spot net coming successful astir $2.30-$2.55 for nan year, depending connected nan grade of economical harm from nan complaint hikes. When considering nan dividend, guidance forecasted $16 cardinal successful free rate flow, which intends nan dividend payout ratio would beryllium astir 50% for nan year. That leaves room for a dividend hike if guidance wants to target a 70% payout ratio. But we judge nan dividend will beryllium held firm, while paying down indebtedness complete nan adjacent 20 years.

What to do?

Arguments tin beryllium made for and against raising, cutting, aliases moreover eliminating nan dividend. For us, this is an income name. At astir $20, a stock we deliberation this is simply a hold, and guidelines by a bargain area nan centers astir $17. The dividend appears safe arsenic acold arsenic nan payout ratio is concerned, and it is specified a bully cushion that free rate travel supports a imaginable hike depending connected nan target payout ratio guidance sees successful nan future.

We spot nan AT&T Inc. dividend being held firm, which intends you will cod a 6%-plus dividend output while indebtedness continues to beryllium addressed. In our opinion, each $10 cardinal diminution successful indebtedness makes AT&T banal much and much charismatic arsenic nan balance sheet becomes little leveraged. We do not spot nan dividend astatine risk, but do admit that if it were trim it would fast-track nan institution to paying disconnected debt. While it would origin a monolithic rotation retired of nan stock, if it were to happen, it could consequence successful a overmuch stronger institution long-term. However, we judge it will beryllium held firm.

Speak up

After reference this and different opinions, do you deliberation AT&T Inc. should prioritize indebtedness by cutting aliases eliminating nan dividend? Should AT&T Inc. raise nan dividend? Is it moreover worthy buying present erstwhile you tin get complete a 5% return connected a 6-month treasury? Let nan organization cognize below.

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