Brandon Bell
American Telephone and Telegraph Company (NYSE:T), the telecom giant’s stock has struggled over the past few years. The company cut its dividend in early 2022 after a long period of maintaining or increasing it.Since then, the stock has struggled Holding above $20 per share, it recently fell below $15 before rebounding. Even after the recent rally, the stock remains a good choice for income investors, with a 7.3% yield and stronger financials.
AT&T shares are getting here after years of declining financial performance. The company’s revenue shrank significantly year over year from 2020 to 2022, and as of last year, revenue was $23 billion lower than it was two years ago. Fortunately, the company’s operating expenses improved, and without asset impairment charges, operating income would have been $23 billion.
2022 SEC 10-K
The expense improvement carried over into the first half of the year, but the company’s revenue also increased. In the first half of 2023, revenue was $700 million higher than a year ago, while expenses were down more than $1 billion. The $2 billion improvement in operating income was only marred by declines in other revenues, but AT&T’s day-to-day operations are producing better results.
SEC 10-Q
A closer look at the earnings side shows a few things. AT&T is transforming its business away from lower-margin wireline revenue and toward its higher-margin mobile business. In fact, AT&T has been growing its market share over the past few years, gaining customers from Verizon and T-Mobile.
SEC 10-Q politician
AT&T’s balance sheet also improved. The company’s shareholders’ equity grew 10% in the first six months of 2023, but that’s not fairly reflected in the share price’s 18% decline year to date. The company’s debt did rise by $7 billion, but its cash position increased by $6 billion and supplier accounts payable have fallen by $10 billion so far this year.
SEC 10-Q
AT&T’s cash flow situation is also in decline after cutting its dividend. Operating cash flow has declined year by year from 2020 to 2022, with free cash flow falling from $23 billion in 2020 to $16 billion in 2022. AT&T also agreed to provide supplier financing for some of its capital expenditures, which increased cash liabilities by $4.6 billion in 2021 and 2022. Apparently there wasn’t enough cash to meet the $15 billion in dividend obligations, so the distribution was cut.
2022 SEC 10-K
In the first six months of 2023, AT&T’s operating cash flow grew by more than $1 billion, and free cash flow increased from $6 billion to $8 billion. Supplier financing has grown to $3.7 billion this year, leaving about $4.3 billion for dividends, enough to cover $4 billion in dividend obligations year-to-date.
SEC 10-Q SEC 10-Q SEC 10-Q
Despite AT&T’s progress, near-term risks loom. With $15 billion of debt due over the next 12 months, the company will have to decide how much to take on from its $9 billion cash load and how much of that debt to refinance. Higher interest rates on newly issued debt could erode earnings and operating cash flow. This could once again call into question the sustainability of the dividend. Investors will have to carefully watch AT&T’s earnings over the next four quarters.
AT&T’s debt load is undoubtedly daunting, but the company’s cash on hand combined with its operational improvements and revenue growth should be enough to support its dividend. The market is pessimistic about the turnaround in AT&T’s stock price. Lower prices and higher dividends provide investors with a great entry point.
