AT&T Cash Flow Disappoints but Analysts Stay Upbeat on Dividend

AT&T's stock plunged by 10% , its biggest percentage drop in more than two decades, after the company's first-quarter earnings release on Thursday. A key concern: Free cash flow was far lower than expected.

Free cash, of course, is a crucial foundation for paying a company's dividend. And for AT&T (ticker:T), which yields 6.1%, the dividend is a key selling point to the company's investor base. First-quarter free cash totaled $1 billion, against a $2 billion quarterly payout for dividends.

However, three analysts Barron's spoke to Friday said they were confident the company's free cash will cover its dividend this year, even after a slow start. AT&T has forecast at least $16 billion of free cash this year, and CFO Pascal Desroches stuck with that prediction in a call with investors to discuss the results.

The company didn't immediately respond to a request for comment about free cash flow and the outlook for the dividend.

"Is the business moving in the right direction? Absolutely. That's the most important piece," says David Barden, senior research analyst at BofA Securities. "The timing elements of free cash flow are less important in the grand scheme."

He calls the odds of the company throwing off at least $16 billion of free cash flow this year "highly probable." The company's 2022 free cash totaled $14.1 billion.

Barden has the stock at a Buy rating with a price target of $25, well above the $18 and change it traded at on Friday afternoon. It closed up 3.2% from Thursday's close at $18.22.

Michael Hodel, director of communications services research at Morningstar, expects the company will pay dividends this year of about $8 billion, about half the free cash he expects the telecom to generate. He thinks the dividend is secure for the foreseeable future.

Last year, the company had to lower its free cash flow guidance, and Hodel thinks AT&T executives are intent on restoring credibility in terms of what is promised to investors.

John Hodulik, a telecom and media analyst at UBS, points out that the company's free cash flow tends to be backloaded in a calendar year. Last year, about 70% of AT&T's free cash came in during the second half the year, he adds.

Another consideration pertaining to the company's ability to pay the dividend is its debt load. As of March 31, long-term debt totaled $123.7 billion, compared with $128.4 billion at the end of December. Having less debt reduces the need to draw on free cash flow to pay interest and repay principal.

Debt remains an issue for AT&T, but leverage is diminishing. At the end of this year's first quarter, the company's net debt (debt minus cash) was 3.2 times its earnings before interest, taxes, depreciation and amortization, or Ebitda, down from 3.4 times a year earlier, according to Hodulik.

The telecom's dividend cropped up as a trouble spot in 2021. In May of that year, AT&T announced that it would spin off WarnerMedia. That resulted in AT&T having to slash its quarterly dividend last year to 27.75 cents a share from 52 cents a share, a move that angered some shareholders at the time.