AT&T’s Big Day
Contributor since 2012 / 42004 Followers
Summary:
- Earnings later this month will be a crucial day for determining if AT&T Inc. stock’s rally continues.
- Strong free cash flow is key to ensuring dividend security, and could there be a raise in store?
- With a sub-50% payout ratio expected, with strategic moves in the works, the company’s significant debt burden is in focus.
- The weakest period of the year has been less than soft, and income names are all the rage with the Fed’s recent action.
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You know, for the weakest period of the year, with added complications from global strife, rampant inflation, and an unprecedented US election year, markets have held up quite well. One stock that has performed well over the last year is AT&T Inc. (NYSE:T), and we have updated you along the way. Back by popular demand, in this column we will address AT&T’s upcoming big day on October 23rd, its Q3 earnings report, which could determine whether the rally continues, or fizzles out after a solid 2024.
There remains risk, like the high debt in this environment, but cash flow remains strong, and since we view this as an income name, free cash flow is paramount to ensuring the bountiful dividend is secure. AT&T, as well as hundreds of other S&P 500 companies, will report earnings for Q3 later this month (expected pre-market October 23rd). Let us discuss our projections for AT&T’s Q3 performance and highlight what we are watching.
The Key AT&T Indicator We Watch is Cash Flow
It is all about that cash flow for AT&T. The better this figure, the safer the dividend, and the more the stock gets bid up. For a number of quarters, the stock continued to wither as cash flow softened, revenue growth stalled, and debt weighed. When Q3 is reported, we are looking for $30.40 billion to $30.80 billion in revenues in Q3. This would be a less than 1% increase from last year at our midpoint in this range.
Now, bear in mind that any boost from the new Apple (AAPL) iPhone 16s will have just started to hit at the end of Q3. Thus, there could be some small boost there, but investors are more likely to see a seasonal Q4 bump from those sales. We will be looking for commentary on such demand on the conference call. While revenue sets the tone, it is all about the cash flows.
The cash flow metrics are simply key for the telecoms, and frankly, most companies, but especially in relation to the dividend. The cash flow metric can impact so much of this stock’s trading behavior, and we have seen that here in 2024. Better cash flow translates to better share prices, and vice versa. When cash flow numbers are strong, confidence in the dividend leads to share appreciation. It is as simple as that. More cash and cash flow allows for leverage reduction, as cash can be applied to the staggering debt. The company has sold many assets, and as we saw, is now looking to merge with Dish. We will be on watch for any updates there too.
Now, as far as performance, revenue in Q2 hit $29.8 billion. This missed analyst consensus by $180 million and missed our more bullish midpoint by $300 million. Our current Q3 view is slightly more bullish than the $30.47 consensus. When revenues miss to start the report, it is carried down many of the lines. However, we saw some positive news in subscriber post-paid adds in Q2, and are looking for positive news on this front again. In Q2, prepaid adds were strong in the quarter hitting 35,000. For Q3, we are looking for 10,000-15,000 adds there. Postpaid phone net adds were 419,000 in Q2, and we think this number tracks for 300,000 in Q3, while we expect a lower than average postpaid churn, at just 0.75%. Furthermore, We are looking for 220,000 fiber net adds, which would be the 19th straight quarter with more than 200,000 net fiber adds.
As we come into Q3’s report, we expect the quarter-over-quarter to be flat to mild gains from last year. Assuming operational expenses somewhat similar to Q2 and slightly increased from Q3 2023, we expect earnings of $0.57-$0.59 per share, which would be a decline of about 10% from last year.
Free cash flow
Free cash flow will be watched closely as this is our gauge for the dividend payment. The last few quarters have seen sizable dividend coverage, and free cash flow expectations for 2024 are a big reason shares have run up this year. AT&T generated free cash flow of $4.6 billion in Q2. With $2.1 billion in dividends paid, the dividend payout ratio was just 45.9%. This means the dividend is more than safe.
For Q3, we think we see very positive dividend coverage. Assuming cash from operating activities of $9.95-$10.50 billion, capex of $4.3-4.7 billion, and unknown estimates for additional financing and capital investment, we are targeting free cash flow of $4.8-$5.3 billion. This would be essentially full coverage of the dividend payments of $2.1 billion, which would be a 42% payout ratio. For the year, management had been forecasting $17-$18 billion in cash flows. Q4 last year was over $5 billion, and year to date in 2024 we have seen about $8.2 billion in cash flow. So, we are looking for another $9-$10 billion in H2 2024.
With a sub 50% payout ratio this quarter very likely, and a comfortable payout ratio for the year, the AT&T Inc. dividend appears secure. We think it could be raised again. It has been held at $0.28 quarterly for two years now, but, there is room for a hike. But, decisions on cash flow are tricky because we know the company has to continue to make massive investments, and of course, there is still the massive debt burden. Total debt was $130.6 billion coming into Q3, and net debt was $126.9 billion. We will be looking for ongoing reduction in the debt. The company expects net debt-to-EBITDA to hit the 2.5x leverage range in the first half of 2025, the lowest it has been in years, but was 2.87X for the trailing-twelve months coming into Q3.
Final thoughts
While we turned very bullish on the stock when it dipped to the mid-teens, we had closed the trade a few months ago as shares eclipsed $19 and are letting some profit run here as a long-term investment. We like this approach with a 6% yield and a dividend that is secure. We also see capital appreciation from here as possible, especially if the company delivers on debt reduction. Watch for cash flows, they are the key. Soon the market will turn to 2025 expectations on these measures, which will be the determinant of the next move higher.
One final thought. With interest rates on a downward path, income names have been and will catch a bid, as income from bonds and cash holdings will be far less in 2025 than they are now.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of T either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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