AT&T: Are We Going To Get A Dividend Hike In 2024?

Summary:

• AT&T has the potential to raise its dividend in 2024 due to growth in Fiber Broadband and prioritization of debt repayments.
• The company’s free cash flow outlook for 2024 is supportive of a potential dividend hike.
• AT&T’s stock has consistently moved above the 50-day moving average line, indicating significant re-rating potential this year.

AT&T Inc. (NYSE:T) is a well-managed Telco that has potential to raise its dividend in 2024. Though the Telco’s dividend growth has flat lined after it separated itself from the media business, WarnerMedia, I think that growth in Fiber Broadband and a prioritization of debt repayments could led to substantial capital gains for AT&T investors this year.

AT&T’s free cash flow outlook for 2024 is also strongly supportive of a potential dividend hike and with an earnings multiple of 7.6X, AT&T is a well-priced Telco.

Since AT&T’s stock is also consistently moving above the 50-day moving average line, I see significant re-rating potential this year.

My Rating History

In my December piece on AT&T I called the telecommunications business A Gift At $16 due to what looked like an impressive dividend coverage profile.

Strength in coverage was a main reason why I thought that AT&T’s stock could reprice which it did: AT&T’s stock has been in uptrend ever since 4Q-23.

I think that 2024 could be a year in which AT&T returns to dividend growth as Fiber Broadband and a strong free cash flow forecast provide support.

AT&T’s Fiber Business Is On A Role

Say what you want about AT&T, but the Telco continues to supply a well-covered dividend yield and the company’s free cash flow forecast for 2024 leaves room for an increase in the regular dividend.

AT&T’s free cash flow outlook for 2024, which sees $17-18 billion in free cash flow. With the dividend presently running at $8.0 billion annually, the Telco is poised to pay out only about 45% of its anticipated 2024 free cash flow.

AT&T profited from a strong upsurge in its free cash flow last year due to fast-growing Fiber Broadband and 5G businesses. In the fourth quarter, AT&T’s free cash flow was the highest in years and it resulted in the Telco beating its free cash flow forecast by a couple hundred million.

AT&T has made a concerted effort in recent years to increase the number of fiber locations in its Broadband segment which has resulted in AT&T reporting its sixth consecutive year of one million (or more) customer net-adds.

The Telco had 8.3 million subscribers in the fourth quarter and more are coming to AT&T’s business in 2024. Importantly, though AT&T’s sales are growing only marginally, Fiber Broadband is seeing some real momentum, with 4Q-23 sales growing 22% YoY.

With this broadband momentum underpinning AT&T’s free cash flow projections and business growth, I think that AT&T has a reasonable shot at handing shareholders a dividend hike.

The company presently pays only $1.11 per share in dividends and taking into account that the estimated pay-out ratio this year is only 45%, AT&T has a ton of room to grow its dividend in 2024.

With AT&T’s dividend going nowhere since the separation from WarnerMedia, the robust free cash flow forecast makes a dividend raise much more probable, in my view.

Technical Analysis

AT&T’s stock price has remained consistently above the 50-day moving average line since October 2023 and the stock has been building positive technical momentum ever since as well.

Presently, AT&T is selling at $17.60 which neither makes the Telco overvalued or undervalued, based on the Relative Strength Index. AT&T has built some support around $17 which is a bullish signal.

I am carefully watching the $17 price level as a drop below this level would indicate short-term correction potential until at least the 200-moving average line which presently runs at $15.52.

How Much Should You Pay For AT&T?

Obviously, the less the better. AT&T is a cash flow-stock, meaning the company’s underlying Telco assets produce a boatload of cash that can be used for strategic investments (such as the expansion of the Fiber Broadband network, 5G), debt repayments, and, yes, even potentially a dividend hike in 2024.

AT&T’s stock is presently selling for a 7.6x earnings multiple whereas Verizon Communications Inc. (VZ) is costing passive income investors 8.9x earnings. With AT&T selling at a lower multiple than Verizon Communications, I think that AT&T offers passive income investors a highly competitively priced 6.3% yield (Verizon’s yield stands at 6.4%).

What Are Some Of The Risks?

I mentioned the company’s high net debt as a reason in the past to be at least somewhat cautious with an investment in AT&T. For that reason, I think that AT&T, as solid as the dividend coverage ratio is, passive income investors may want to consider a limit to the portfolio weighting if they want to include AT&T.

Though the dividend is well-covered by free cash flow, AT&T’s considerable net debt of $128.9 billion is something that should passive income investors should at least consider as a potential anchor to AT&T’s stock.

My Conclusion

AT&T is, with a 5% portfolio weighting, my largest position in my passive income portfolio. Though AT&T’s lack of meaningful profit growth as well as the Telco’s large net debt are issues that investors should at least be aware of, AT&T is poised to deliver strong results in 2024, in my view, as its underlying Fiber broadband business continues to have a lot of growth momentum. Thus, I actually think that AT&T could be in a position to grow its dividend in 2024.

AT&T’s value proposition is substantially enhanced by the company’s low earnings multiple as well as the uptrend in the stock that has allowed AT&T to keep its head above the 50-moving average line ever since the fourth quarter.

With a possible dividend hike on the horizon in 2024 and ongoing momentum in Fiber, I think that AT&T is one of those companies that would be worthy of an overweighting in a passive income portfolio.

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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.

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