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AT&T's recent quarterly results released on April 20 didn't impress many people. This especially applies to investors who are worried about whether the dividend is safe.
AT&T stock is down to $16.98 as of May 10 down 1.6% since April 20 when it closed at $17.25. It's also off 11.8% since the end of March ($19.25).
The problem is the dividend. The company pays a $1.11 annual dividend. But adjusted earnings were 63 cents. That leaves a shortfall.
Cash Flow Shortfall
Another way to look at this is from a cash flow standpoint. The quarterly dividend costs $2 billion. But the company's free cash flow before the dividend was only $1 billion. So, the shortfall, at least last quarter was about $11 billion.
But the company said to not worry about this shortfall. Here's why.
The CFO, Pascal Desroches, told analysts on the conference call that AT&T expects its annual FCF will reach $16 billion. That is twice the $8 billion annual dividend cost.
So, AT&T wants you to believe the shortfall will disappear and you should trust them. There is probably good reason to believe this will happen.
AT&T's CEO, John Stankey, followed up with that by emphasizing that the lower Q1 FCF levels were due to seasonal, one-time cash expenses for compensation (bonuses) that were paid out. He said he felt "really good about delivering $16 billion or better."
Where This Leaves Investors
Investors probably need a bit of faith here. They have to believe that the company's free cash flow will rise to the point where it can cover the dividend. If this doesn't happen next quarter, the stock will likely drop further from here.
But, if not, the dividend yield here is very attractive. For example, at $16.88 today, the stock has a 6.58% dividend yield.
However, over the last 5 years, its average yield has been just over 7% according to Morningstar. That implies that the stock could fall slightly more if it were to go to this yield.
For example, with the present $1.11 annual dividend, AT&T stock would have to trade at $15.86 for it to have an average 7.0% yield.
So there could be some downside risk here. Just to get to the average yield of 7.0% it could fall another $1.12 or 6.6% from here.
On the other hand, the stock could rally once it becomes clear what the company is saying about free cash flow occurs. For example, if it can show that free cash flow covers the dividend next quarter, AT&T stock could move significantly higher from here.
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