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AT&T: A Dividend Powerhouse with Long-Term Upside

AT&T, known for its attractive dividend yield of 4.75%, is gaining attention not only for its consistent payouts but also for its potential stock appreciation. Plus, the company may increase dividend in the future as it is known for offering a return of above 5% in the past.

AT&T has long been a cornerstone of dividend investing, maintaining a steady payout since going public in the 1980s. For decades, it set a benchmark with a 35-year streak of increasing dividends.

However, in 2022, AT&T made a dramatic cut to its quarterly dividend, slashing it nearly 50% from $0.52 to $0.28. This decision ended its impressive growth streak and was driven by the company's heavy debt burden, which reached 3.6 times net debt to EBITDA. The debt largely stemmed from two costly and unsuccessful acquisitions—DirecTV and Time Warner—that resulted in significant financial setbacks.

AT&T’s dividend yield trajectory has sharply declined since 2021, as seen below:

Since 2022, AT&T has maintained stable quarterly dividends.

In 2023, the company reported $20.46 billion in free cash flow (FCF) and allocated $8.13 billion to dividend payments, utilizing just 39% of its FCF. This conservative payout ratio provides AT&T with significant flexibility to manage potential cash flow declines, reducing the likelihood of dividend cuts, scaling back reinvestment, or increasing debt.

This marks a notable improvement from 2022 when 77% of AT&T’s free cash flow (FCF) was directed toward dividends. That year, cash flows were impacted by key strategic changes, including the WarnerMedia spinoff, which shifted the company’s focus to its core telecom business. This divestiture reduced revenue and cash flow from media operations, temporarily straining overall FCF.

Additionally, AT&T significantly ramped up capital expenditures in 2022, investing heavily in 5G infrastructure and expanding its fiber network. While essential for maintaining competitiveness, these investments led to higher immediate cash outflows, further pressuring FCF in the short term.

Now with cash flows normalizing, AT&T appears well-positioned to sustain its current dividend levels. The company’s progress in reducing debt and targeting a 2.5x leverage ratio (net debt to EBITDA) by mid-2025 adds further confidence in its financial stability and dividend reliability.

Goldman Sachs forecasts "significant upside" for the Dallas-based telecom giant, highlighting multiple growth drivers. According to analyst James Schneider, AT&T has the potential to deliver annualized returns exceeding 20% over the next four years, pushing the stock price above $40.

Currently, the average price target for AT&T is $24.15. The highest analyst price target is $30, while the lowest forecast is $19.

Industry Dynamics Support Growth

One key factor driving this optimistic outlook is the stabilization in the wireless industry.

Competition among major players—AT&T, Verizon, and T-Mobile—has plateaued, with all three implementing price increases in recent quarters. Additionally, the industry's capital intensity is moderating, providing AT&T with more room to allocate resources toward growth initiatives.

AT&T boasts an impressive 4.75% dividend yield, well above the peer-group average of 3.92%, which includes Verizon Communications, T-Mobile, and Comcast.

Notably, AT&T's payout ratio remains comfortably below the 75% threshold, a level often viewed as a warning sign for dividend sustainability and growth. This suggests that, even amid a slowing economy, AT&T's substantial dividend is likely secure.

Fiber Expansion: A Core Strategy

AT&T's aggressive expansion of its fiber network is another significant growth driver. With a revised goal to reach 40 to 45 million locations, the company is well-positioned to accelerate broadband revenue.

Schneider notes that this expansion not only offsets legacy business declines in DSL and U-verse but also supports AT&T’s strategy of cross-selling fiber and wireless services for stronger per-customer returns.

Broadband subscriber growth is expected to improve significantly, reaching 1% to 3% annually from 2024 through 2026, compared to flat growth in 2023. Consumer wireline revenue could accelerate from 3% growth in 2024 to 4% by 2026, driven by the growing fiber business and the phasing out of copper networks.

Enhanced Profit Margins and EBITDA Growth

The shift away from legacy infrastructure is expected to enhance AT&T's profit margins. By 2029, cumulative cost savings could push the company’s EBITDA to between $47 billion and $50 billion.

Schneider predicts sustained annual EBITDA growth of 3%, which is notably higher than Wall Street’s current expectations. This growth, combined with potential multiple expansion, could make AT&T an even more attractive investment.

Valuation and Market Position

AT&T currently trades at 6.6 times its estimated 2025 EV/EBITDA, a discount compared to its peers. This undervaluation reflects investor skepticism about AT&T’s ability to sustain its growth. However, Goldman Sachs believes the company’s improving fundamentals and consistent EBITDA growth could drive a re-rating of its valuation over time.

Already up 35% year-to-date, excluding dividends, AT&T has demonstrated robust performance and offers a compelling case for long-term investors.

But Remember This

AT&T's low valuation comes with valid concerns. Wall Street projects modest revenue growth of just 1.6% in 2025, with forecasts indicating similarly sluggish growth in the low single digits for the foreseeable future.

This underwhelming outlook is driven by two main challenges: fierce competition among top-tier telecom providers—AT&T, Verizon, and T-Mobile—and the rise of new technologies enabling more low-cost competitors to enter the market.

In essence, AT&T's stock may not be the bargain its forward price-to-earnings (P/E) ratio suggests.

Lesson for Investors

AT&T isn’t the best name in this industry. In fact, with its higher yield, consistent growth, and lower leverage, Verizon currently stands out as the better choice for passive income right now, but if you look at the larger picture, you’ll see that AT&T seems destined for bigger things

If AT&T continues to strengthen its balance sheet, it may have the capacity to enhance shareholder returns through dividend increases and stock buybacks. Such moves could make AT&T a more appealing option for income-focused investors in the future.

We think 20% per year is a very rewarding figure, which makes AT&T an excellent dividend stock to own. Investors with a long-term outlook and tolerance for industry shifts could find significant value in this telecom giant.

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