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Will AT&T increase its dividend this year?
Before the pandemic disrupted its operations, ATT (NYSE:T) was a reliable dividend stock. Not only that, but it was also a dividend-generating stock. For decades, the company has increased its dividend payments, and in 2019, its streak reached 36 consecutive years of quarterly dividend increases. When the pandemic hit, the company kept its dividend intact but did not increase the payout.
Then, after spinning off WarnerMedia in 2022, it adjusted (reduced) its pay to be more manageable. But the company hasn’t increased its dividend since then, even though its operations appear more stable and consistent. Now that the company’s results look even stronger in 2024, could a dividend increase finally be on the cards?
AT&T’s Free Cash Flow Continues to Expand
An important number for dividend investors One thing to consider when analyzing income stocks is free cash flow (FCF). This represents the operating cash flow left over for a company after making capital purchases. A dividend-paying company needs strong free cash flow to ensure it can balance its growth initiatives and dividends without worrying about raising additional funds.
Last year, AT&T’s free cash flow totaled $16.8 billion, slightly higher than the company’s expectations. For 2024, the telecommunications giant expects free money to be even greater, in a range of US$17 billion to US$18 billion.
Annually, the company pays approximately $8.2 billion in dividends. This means that if AT&T tops out its free cash flow guidance this year, it could end up paying out just 46% of its free cash as dividends. Not only is this sustainable, but it also leaves plenty of room for the company to potentially increase its current quarterly dividend of $0.2775.
Could a dividend increase happen this year?
Business is going well for AT&T right now, as the company expects wireless revenue to grow about 3% this year and broadband revenue to increase by at least 7%. It seems likely that from a financial perspective, AT&T could justify a dividend increase.
But I don’t think the company is in a rush to make one. To begin with, the telecommunications stock already pays a dividend that yields 6.5% – more than four times higher than the S&P 500 average of 1.5%. Investors can already earn a great yield from AT&T stock right now, so there may not be a big need to increase the dividend just yet.
Second, there isn’t a lot of excitement around telecom and dividend stocks as a whole. With interest rates remaining high, investors have more ways to generate recurring cash flow than just buying dividend stocks, which are often riskier options than bonds, for example.
The story continues
Since the beginning of 2022 (when interest rates started to rise), the iShares US Telecom ETF decreased by 34%. If AT&T announces that it will start raising its dividend again right now, it might not get much attention. Perhaps it would be better if the company waited for interest rates to fall so that dividend-paying stocks were back in the spotlight.
Historically, AT&T has announced dividend increases at the end of the year. If that happens this year, there could be one or two interest rate cuts by then and dividend stocks could rise. In that case, AT&T’s revenue could start to decline. If that happens, I believe AT&T could announce a rate increase by December.
Should you buy AT&T stock today?
If you’re a dividend investor looking for a good payout, AT&T could be a great stock to buy now. Odds are that stocks will start to rise when interest rates fall, and buying AT&T stock before that happens could help you secure better returns.
Even if the dividend doesn’t increase this year, it may only be a matter of time before it does. The company’s strong finances make it likely that AT&T will start increasing its payments again, but it may be choosing the right time to do so. Now that the company is no longer involved in the streaming business, its finances are in much better shape and the business should generate a solid long-term investment.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The motley fool has a disclosure policy.
Will AT&T increase its dividend this year? was originally published by The Motley Fool