AT&T's FCF More Than Covers the Dividend, Securing Its 6.5% Yield

AT&T (T) produced $3.8 billion in free cash flow (FCF) during Q3, which is more than enough to cover the cost of its dividend. This makes the $1.11 per share annual dividend very secure. At today's price of $16.98, the 6.5% annual dividend yield for T stock is very attractive.

AT&T reported that its Q3 FCF of $3.8 billion, which was significantly higher than the $1.4 billion in FCF during Q2. Moreover, this more than covers the $2.01 billion quarterly cost of its 27.75 cents quarterly dividend.

In addition, the table below shows that revenue grew by 3.1%, and Adj. EBITDA grew 4.7%.

Moreover, the CEO, John Stankey, underscored this point during the earnings conference call. 

“…we hope this healthy free cash flow for the quarter gives you confidence in our ability to achieve our target for free cash flow in the $14 billion range for the year, a level that is more than ample to support our $8 billion dividend commitment.”

That should give investors a good deal of confidence that the company can keep paying down its debt, upgrading its telecom operations, and yet still cover the dividend.

Where This Leaves Investors in T Stock

So far this year, AT&T stock is down 11.5% and this includes a drop of over 15.8% in the last 6 months. This puts AT&T stock in bargain territory.

Analysts now project that earnings per share (EPS) will hit $2.57 this year. That puts the stock on a forward price-to-earnings multiple of 6.5x. This is historically very cheap.

For example, in the past 5 years, the stock has had an average forward P/E multiple of 9.0x. That is 38.5% higher than today's multiple and implies a huge upside in T stock.

Assuming that the company's free cash flow can continue to move higher it is even possible to expect that the company might consider raising the dividend sometime next year. Although AT&T has made a commitment to hike the dividend, the company's CFO, Pascal Desroches, did say this:

“We are very comfortable with our cash levels after paying our dividend commitment, and this should only increase in the future years as we expect cash conversion to improve from here.”

This seems to imply that as the FCF level rises from higher “cash conversion” its ability to raise the dividend will rise as well. The bottom line here is investors might expect T stock could rise over the next year as investors become comfortable with its ability to cover the dividend.

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