AT&T (NYSE: T) shares have not participated in the broad market rally since stocks bottomed earlier this year.
That’s not too surprising considering that many people still think of AT&T as a phone company.
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
Good investing,
— Marc
Carnegie didn't invent steel. He used new technology to produce it cheaper and faster than anyone on Earth. Rockefeller didn't discover oil. He used industrial machinery to refine it more efficiently. Vanderbilt didn't build the railroad. He understood that whoever controlled the infrastructure controlled the economy. Their combined fortunes were between $700 billion and $1 trillion. Best-selling financial author Alexander Green has identified three companies positioned to be the Titans of the AI age. CLICK HERE TO FIND OUT WHO THEY BEFORE THE WINDOW CLOSES.
Source: Wealthy Retirement
