AT&T (NYSE: T) shares have not participated in the broad market rally since stocks bottomed earlier this year.
While much of AT&T’s business is still focused on phone service, the old “Ma Bell” is now also a content company. It owns HBO, Warner Bros. Entertainment, CNN and other programming giants.
This lack of participation in the market’s run higher, along with a juicy $0.52 per share quarterly dividend, give the stock a 6.9% dividend yield – the likes of which, in this market, tend to be reserved for riskier master limited partnerships and real estate investment trusts.
Can investors continue to rely on AT&T’s nearly 7% yield?
After several years in a row of free cash flow growth, AT&T’s cash flow is forecast to take a step backward this year by nearly $2 billion.
SafetyNet Pro does not like declines in free cash flow.
Last year, AT&T paid shareholders $14.9 billion in dividends for a 58% payout ratio. This year, the payout ratio will likely tick higher to 62%.
Under normal circumstances, those payout ratios would be well within my comfort zone. However, these are not normal days…
We’re in a pandemic, and business is not as usual. As a result, I have tightened my payout ratio parameters to make SafetyNet Pro more conservative.
I’d rather be too cautious with a dividend safety rating than get caught unaware when a dividend gets cut.
My previous threshold for a safe payout ratio was 75%. Anything above that received a penalty in the SafetyNet Pro rating. Today, that limit is down to 50%.
As a result, AT&T gets dinged twice, once for last year’s payout ratio being more than 50% and another for this year’s payout ratio.
That said, AT&T is significantly lowering its debt and is committed to its dividend, which has been raised every year since AT&T spun off all of its Baby Bells 36 years ago.
I believe this is a case where SafetyNet Pro is being a little too cautious…
The safety rating suggests a moderate risk of a dividend cut.
However, considering management’s commitment to the dividend, and considering that while the payout ratio is above the new COVID-19 boundary, it’s still below the normal threshold, I suspect AT&T’s dividend is fairly safe.
Dividend Safety Rating: C
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Source: Wealthy Retirement