AT&T Stock: A Wonderful Case For Dividend Investors (NYSE:T)

December final yr, I issued a bull thesis on AT&T Inc. (NYSE:T) arguing that the then-current dividend in addition to the general funding case from a complete return perspective appear engaging sufficient to warrant a purchase.

There have been three elementary drivers behind this:

Depressed multiples at ranges which can be attribute for firms with inherently risky money flows. Enhancing free money circulate technology resulting from a extra balanced CapEx agenda together with rising enterprise outcomes. Enhanced sustainability of the dividend stemming from level two above in addition to the comparatively current dividend lower.

Whereas articulating the purchase, I particularly highlighted that T positively deserves an additional low cost from its previous errors in destroying components of the shareholder worth by means of sizeable however poorly performing M&A transactions. Within the efforts to develop horizontally and vertically, T assumed appreciable quantities of debt, which have actually not been coated by the extra money technology from, say, the entry in media enterprise by way of Warner Media. On prime of this, the current dividend reductions don’t introduce consolation for buyers both, which, in flip, ought to be mirrored within the valuation metrics accordingly.

With that being stated, it’s clear that the choice to go lengthy T again in late December final yr has paid off. Since then, T has registered a complete return efficiency of ~ 16%. Plus, after T circulated its This fall, 2023 earnings deck, I made a follow-up article by particularly dissecting the earnings dynamics, and nonetheless recommending a purchase.

As we will see within the chart under, T has continued to ship sound returns after the issuance of This fall, 2023 and Q1, 2024 earnings report. Actually, the restoration course of has been so robust making T’s whole efficiency virtually precisely in keeping with that of the broader (progress centered) market.

Now, after seeing this that T has managed to get better a bit and in addition, there’s a Q1, 2024 deck on the market, let me know elaborate on why, for my part, buyers ought to nonetheless maintain on to their lengthy positions on this inventory.

Thesis overview

All in all, T’s value restoration might be deemed totally justified and supported by a continued momentum in enhancing the underlying fundamentals.

Earlier than I clarify this in a bit extra element, let me rapidly plot the bear case.

As most of T’s returns up to now have been pushed by the worth appreciation part, the dividend yield has decreased accordingly. The yield has dropped from round 6.5% to five.9%, which makes the inventory a bit much less engaging for yield-seeking buyers.

Additionally, the TTM P/E ratio has elevated from 8.8x to circa 10x. Plus, the truth that T has correlated so strongly with the S&P 500 raises the query of how sustainable it’s and when this pattern may break.

Nonetheless, right here is the factor.

The Q1, 2024 earnings got here in robust, indicating a gradual strengthening in virtually all the main enterprise traces. When it comes to the top-line, the Q1, 2024 mobility service and fiber revenues had been up by 3.3% and 19.5%, respectively, relative to the identical interval final yr. Nonetheless, the enterprise wireline phase, as anticipated, decreased by circa 8%, thus rendering the overall gross sales for Q1, 2024 flat.

Whereas the top-line dynamics had been steady, the actual enhancements might be observed within the bottom-line parts, with T having the ability to obtain a margin enlargement in virtually all the key enterprise traces. For instance, the overall adjusted EBITDA ticked larger by 4.3%.

The commentary within the current earnings name by John Stankey – Chief Govt Officer – supplies a pleasant colour on how T has been centered on enhancing its working leverage to drive the margin enlargement, which actually is the important thing sauce to create worth in a mature telco enterprise.

The continued adoption of AI just isn’t solely serving to us make progress on this objective, but in addition benefiting our worker and buyer experiences. This give attention to effectivity is translating into improved working leverage regardless of continued elevated inflation. You’ll be able to see this in our money working bills, which had been down year-over-year within the first quarter contributing to adjusted EBITDA margin enlargement of 170 foundation factors.

One other essential aspect that’s value underscoring right here is T’s free money circulate profile, which has lastly stabilized at ranges the place the administration can actually begin executing on the plans to deleverage the enterprise.

The desk under signifies, throughout Q1, 2024 retained about $1.1 billion in recent liquidity after making the required CapEx and dividend distributions.

Because of the FCF retention, we will already now see progress in how T optimizes its steadiness sheet. The Q1, 2024 ended with a internet debt to adjusted EBITDA of two.9x, offering a pleasant trajectory of assembly the communicated goal of two.5x in Q1, 2025. Within the meantime, as T pays down a part of its excellent debt (though we have now to contemplate that a part of the steadiness sheet optimization revolves round rising the adjusted EBITDA technology), we should always anticipate a decrease stress on the curiosity expense entrance. Throughout the quarter, the money paid for servicing the debt (with out amortization) elevated by ~5% (in comparison with Q1, 2023), which matches hand in with T’s well-laddered debt maturity profile. But, given the give attention to debt discount and the presence of properly distributed debt maturities, we should always not assume a significant stress on T’s money technology from larger curiosity prices.

As a substitute, for my part, we may slowly begin factoring in a possible dividend improve, particularly ranging from the subsequent yr, when the leverage goal is predicted to be met. It’s clear that sustaining a FCF dividend payout of ~ 65% for such a well-established enterprise in a structurally mature trade doesn’t make sense offered that the capital construction in the suitable steadiness.

Furthermore, in the identical earnings name the remark by John Stankey about dividend stability offers a further layer of confidence that the monetary danger will likely be managed, and the incremental dividend hikes may also be balanced:

I’d provide you with some characterization proper now, as we have labored actually arduous over the past couple of years to make sure we shield the dividend. And I feel you’ve got seen that we have finished that, and we have put ourselves in a extremely robust monetary place. That is paramount and essential to us, as we transfer into this.

The underside line

For my part, T has arrived at a degree in its technique, the place it has lastly delayered sufficient to give attention to enhancing the operational efficiency of its core companies, whereas directing surplus money technology in direction of steadiness sheet optimization. The current monetary information affirm this, the place the adjusted EBITDA continues to slowly however certainly tick larger with the leverage profile progressively converging to 2.5x goal stage by Q1, 2025.

These dynamics ought to justify the current run-up in T’s share value, in addition to render the general funding case engaging, particularly from a dividend investor perspective. Whereas the present yield just isn’t the best it has been for T, we have now to contemplate the dividend hike potential ranging from Q1, 2025 when the capital construction is predicted to be at its optimum. In the meantime, if T continues to register 3-5% in EBITDA progress (which is probably going given the CapEx spend and give attention to enhancing working leverage), experiencing an extra upside within the share value ought to be a sensible situation.

Because of this, I stay bullish on AT&T Inc.