AT&T Stock Now With a 6.0% Dividend Yield Is Excellent Value

AT&T (T) produced its best earnings in terms of postpaid new accounts in the past 10 years. That is what AT&T reported on July 21 when it released its Q2 earnings. 

In fact, all of the company's numbers were positive. And they even beat Wall Street expectations. So why did the stock fall 11.5% in 2 days from $20.80 on July 19 to $18.40 by the close on Friday, July 22? 

The bottom line and the main takeaway you should now have is that AT&T stock now trades at a dividend yield of 6.0%. This is because the annual dividend is set at $1.11 by management. And $1.11 divided by $18.40 provides investors a solid 6.03% dividend yield. The stock is not likely to last here very long. 

In fact, this is the same yield the stock had before it spun off shares of Warner Brothers Discovery (WBD) to its shareholders in early April.

Free Cash Flow (FCF) Issues

The best explanation I have heard about why the stock fell is that the company's free cash flow (FCF) is now lower than Wall Street expected. For example, if you watch this YouTube video from Dividend Data, you can understand this better. 

AT&T produced just $1.4 billion in FCF during Q2, compared to $5.2 billion last year. You can see this in the highlight page below. 

More importantly, the company lowered its FCF guidance to just $14 billion for 2022. The market must be worried about the dividend since dividend payments are taken out of FCF.

Further Analysis

But let's look at that carefully. First, the only thing that matters is what the situation is going forward. Second, there are now 7.126 billion shares outstanding, based on page 5 of its earnings data supplement. Third, if we divide $14 billion in FCF by 7.126 billion shares outstanding, that works out to $1.9646 per share in FCF. 

This is well more than the $1.11 in annual dividends. In other words, the company's FCF more than covers the dividend requirement as the dividend is not more than 56.5% of its FCF.

Now some may say that AT&T announced on Feb. 1 that it aims to pay out 40% of its projected FCF on dividends. That is lower than today's payout ratio.

But analysts and the company have not yet put together a projection of 2023 FCF. I suspect that it will be substantially higher due to lower debt costs and depending on how fast the company adds in new subscribers. For example, if the growth rate in subscriber 5G adds slows, its FCF growth will be higher as the company will not need to purchase as much equipment. 

Lastly, there is virtually no prospect that the company will cut its dividend from here. That would be colossally destructive to the stock price. After all, it already cut the dividend from $2.08 last year.

Here is the bottom line. AT&T is not going to cut its dividend, so its 6.0% dividend is a real bargain here.

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