Is ATT’s 7% Dividend Safe? A Comprehensive Analysis

Investing in telecommunications stocks, especially those with a significant dividend yield, can be a lucrative but risky proposition. One such stock is ATT (ATT), which currently boasts a 7% yield. In this article, we will explore whether ATT's dividend is safe and whether investing in this stock is a sensible move.

Risk and Dividend Safety

The safety of ATT's dividend has been a topic of debate among investors. There are no guarantees in investing, and while ATT has a history of paying dividends, changes in the company's financial situation or market conditions could impact its ability to continue doing so.

It's important to remember that dividends and stock prices are interrelated. If the stock price were to rise by 25%, the dividend payout might fall by the same percentage. Instead, ATT has been able to maintain its dividend payments, despite the volatility in the market, which is a positive sign, given their industry's current state.

Debt and Dividend Prioritization

Some financial analysts have raised concerns that ATT might prioritize debt repayment over dividend payouts. Given their significant debt burden, it's reasonable to question whether the company will maintain its dividend at its current level or reduce it to ensure debt reduction goals are met. Attending to debt repayment isn't inherently bad; however, it has the potential to affect shareholder returns.

The chart below highlights ATT’s dividend payouts from 1984 to the present, showcasing a steady increase aside from one minor glitch in 2003. Notably, dividends were around $1.40 per share in 1984, but by 2023, they had climbed to $7.00 per share. This indicates a move in a positive direction for investors in the long term.

High Payout Ratio and Growth Concerns

A high dividend payout ratio can be a red flag, as it may indicate a lack of reinvestment in the company. ATT's payout ratio has been consistently high in recent years. Currently, the company is paying out approximately 56% of free cash flow as dividends, which is a very high figure. This raises concerns about whether the company is investing enough in its growth prospects.

Typically, companies that have given up on growth see their share prices decline over time. With ATT’s focus on providing cellular service, a vital component for people in almost every scenario (even more so in a recession), the strong demand for their services suggests they are well-positioned for continued success.

Investment Prospects and Price Considerations

Despite the potential risks associated with a high dividend payout ratio, the current price of ATT stock offers a reasonable value. The stock's price reflects its current market dynamics and recent acquisitions like Time Warner, which are expected to add significant revenue in the coming years.

Given ATT's leading position in the cellular service market, alongside competitors like Verizon, the demand for their services remains strong. Most people would be unlikely to cut out their cell phone service, even during a recession, making ATT a more resilient company compared to others in the same industry.

Based on the analysis of the dividend safety, the company's debt situation, and the current market conditions, ATT’s dividend appears to be relatively safe. The recent acquisitions and strong industry position suggest that the long-term prospects for the company are positive.

The stock's price and the dividend yield create a compelling value proposition for investors. Given ATT’s history and current financial health, it may be a wise investment to consider, especially for those seeking reliable income in uncertain times.

Disclosure: ATT is one of my largest stock holdings, and as the stock prices are currently favorable, I may even consider increasing my position.