AT&T Stock (NYSE:T)
With its most recent quarterly report, AT&T (NYSE:T) seems to have put a “tiger in the tank.” That should mean that shareholders will have a much better time in the future than they did in the past. So, forget about the past ten years and prepare for something different. AT&T stock will probably go up because of that.
Cash Flow
By far, the biggest surprise was the rise in free cash flow.
There were many worries about whether the dividend could be paid out of the cash flow. So far, the pattern is that cash flow is “end loaded,” with a lot of cash coming in during the fourth quarter in both years (as shown above). So, if “concerns” about the dividend come up early in the fiscal year, all you or any other investor need to do is point out that the fourth quarter seems to have an unusually high level of free cash flow. So, unless there is a good reason for a big change, the pattern will likely continue as it has been.
Cash flow and free cash flow went up, which is interesting because DIRECTV only made a small contribution this quarter. That makes me think the rise in free cash flow is even more impressive.
Capital expenditures were low in the fourth quarter compared to the first quarter. In both cases, the amount spent on capital projects in the fourth quarter is less than 25% of the whole budget.
After dividends, there was a lot of free cash flow. The management has said in more than one place that most of the original $6 billion in savings have been made. The money saved on costs should increase cash flow even more as the business grows, making it possible to pay off debt at a reasonable rate in the future.
One thing that upset the market was that there needed to be more cash flow right after the division was split off for the merger. But it takes time to do anything with a big company. Still, another dividend cut for the year’s first half made Mr. Market nervous. The growth of the business and the cost savings that have reached the original goal make it less likely that this will happen in the future.
Management thinks free cash flow will be at least $16 billion in the current fiscal year. The fourth quarter’s great report makes that free cash flow look like it was too low. Cash flow and free cash flow both went up by about 20% in the fourth quarter. Yes, free cash flow will be at least $16 billion if management can keep going at this rate for another year.
Also, the company’s focus after the spinoff (and merger) will likely lead to more ways to cut costs, which should keep cash flow growing by at least 10% a year for at least the next five years. By the beginning of the next fiscal year, the total debt will likely be less than $100 million (second quarter at the latest). Things are looking up quickly.
At the moment, the chances of a dividend cut are probably in the low single digits. The most likely time for the dividends to go up is now the fiscal year 2024.
What’s Different?
AT&T’s new CEO has made sure that it focuses on what it does best and gets rid of what it does badly. This company had been buying up other businesses for what seemed like forever. That’s the end of the story for now. It is possible to make a “bolt-on” purchase or buy new technology that fits in with the business. But “acquisition after acquisition” is no longer an option.
Instead, the business will grow on its own. At the moment, organic growth is in the low single digits. But as this company works to improve its strategy, that growth rate could go up to 8%. The businesses that are still open have some room to grow in the future.
For the foreseeable future, this should lead to a return of some capital appreciation and a dividend yield in the low teens. This big company is switching from focusing on dividends to growth and income. That should be good news for retirees since many investors count the current dividend yield alone as a long-term return on stock market investments.
Clearly, the market liked the news about the company’s earnings for the fourth quarter enough to send the stock up and then keep the gain in trading after the market closed. Most stock market investors have seen an annual return of 8% over the long term (over the years). So, before looking at the stock’s price, the current yield almost entirely meets the long-term results (of appreciation potential).
There is some dividend risk with the current yield, but that risk should go down as more good quarters are reported. Management has been working on the results we see now for about three years. That means more improvements are on the way since refocusing a large company can take at least five years (and sometimes longer). But AT&T stock price reflects little, if any, potential growth. On the other hand, the dividend yield shows that the market is feeling the opposite way (in a bad way).
That’s fine with me because the bad news is already priced into the stock price, while the good news is just getting started. I want my growth and income stocks to have this kind of uneven return.
Featured Image: Freepik
