AT&T Q4 Earnings: Strong Free Cash Flow (NYSE: T)

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AT&T (NYSE:T) just reported fourth quarter earnings as covered by Seeking Alpha here. On what looks like a good day for the market, it’s no surprise the stock is up more than 2% pre-market [although this could change on a dime] as the company beat on earnings, EPS and provided more information about AT&T after the spinoff.

So what is the key metric we are talking about here? Free movement of capital [FCF]. We are used to analyzing AT&T’s FCF before and after earnings, as discussed in this article from years ago. But why FCF you may ask.

Why Cash Flow Above EPS

When evaluating dividend coverage, most investors and analysts tend to look at earnings per share [EPS]. We prefer free cash flow as the best indicator of financial health for the following reasons:

  • Profits tend to go up and down based on rare events and write-offs.
  • Earnings are more subject to GAAP fluctuations.
  • Cash flow is king.

AT&T reported FCF of $8.7 billion in the fourth quarter of 2021, which means a jump of 13% year-on-year. Let’s assess the health of AT&T’s current dividend using the latest FCF numbers.

  • Total outstanding shares: 7.15 billion
  • Current quarterly dividend per share: $0.52
  • Quarterly FCF required to cover dividends: $3.718 billion
  • Average quarterly FCF over the last five years: $6.29 billion (including Q$ just reported)
  • Payment in FCF over five years: 59% ($3.718 billion divided by $6.29 billion)
  • Average FCF on TTM (including the just-released T4): $6,675 billion
  • Payment with TTM FCF: 55% ($3.718 billion divided by $6.675 billion)

(Source: YCharts.Com)

Are things worse or better?

At the time of the article linked here, AT&T was trading around $30. Given all the negativity in the stock (despite the recent uptrend), would you believe it if we said that all of the numbers shown above look better now than they did about 18 months ago? But it’s the truth. AT&T ticked all of those key boxes: shares outstanding remained more or less constant, debt didn’t grow much by AT&T standards (thankfully), FCF rose and, therefore, the payout ratio using FCF fell 11% using 5 year average and 2% using trailing 12 month average.

But the new dividend?

Obviously, the numbers above include WarnerMedia, which means that the new FCF and dividend will be different, which should be completed in the second quarter according to this morning’s publication. There have been many questions surrounding the new dividend and the latest free cash flow figure helps to arrive at a more accurate estimate.

  • AT&T has announced its intention to pay 40% of the future FCF (post spin off) in the form of dividends.
  • As reported in Seeking Alpha’s coverage, FCF for 2022 is expected to be $20 billion for AT&T’s “new” spin-off.
  • This means the company is committing $8 billion for dividends going forward.
  • Using the current outstanding shares of 7.15 billion and the current annual dividend of $2.08, we get $14.872 billion that the company currently pays out as a dividend from its FCF.
  • To summarize, the new dividend will be around 55% of the current $2.08 per year. It’s about $1.15 per share annually.

Conclusion and forward thinking

Please keep in mind that this does not mean that the yield will be roughly halved compared to today. It depends on how the finer details of the split play out, including the exact payout to AT&T shareholders for the 71% stake in the new company and its impact on AT&T’s current stock price. We think this analysis is correct and that the new yield will always be at least 6%. With the latest report showing strength in key areas such as the 5% increase in mobility revenue and postpaid net additions, there are signs that things could improve if AT&T is run as a telecommunications instead of pretending to be something they were and quite honestly never will be.

The market rebounded violently from its lows on Monday but still sold on Tuesday. Microsoft (MSFT) Earnings and Guidance appears to have at least temporarily restored optimism, but we believe the rotation into safer stocks is not over with a host of macro clouds hanging over the market, including the current Fed meeting and geopolitical risks. AT&T could benefit if the 2022 market continues its January momentum.

AT&T remains a large position in our portfolio, but to use an analogy we used in the previous article, it’s a problem child under close watch due to past behavior. More reckless behaviors like adding unreasonable debt or recklessly expanding outside of their area of ​​expertise can send that child to the write-off. For now, the line is toed and AT&T is staying.

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