From the end of 2023 through Jan. 28, shares of AT&T (NYSE: T) rose 48%. Although it had been offering an ultra-high dividend yield, the company hasn't altered its payout since reducing it in 2022.
About a year ago, shares of AT&T were offering a yield above 6%, but price appreciation has lowered that figure considerably. At recent prices, the stock offers a far less enticing 4.6%.
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Now that price appreciation has lowered the yield AT&T offers, income-seeking investors can receive a similar rate of return from risk-free Treasury bonds or an FDIC-insured savings account.
A new investment in AT&T only makes sense if we can reasonably expect a rising dividend payout. Here's a look under the hood to gauge the chances of significant payout raises over the next several years.
Moving in the right direction?
As the second-largest member of America's three-way telecommunications oligopoly, AT&T reported steady revenue despite declining business wireline sales. Total revenue in 2024 declined 0.1% to $122.3 billion.
On the bottom line, the company's performance in 2024 wasn't inspiring, either. Operating expenses rose 4.3% last year to $103.3 billion. A combination of stagnant sales and rising expenses pushed net income per share down by 24% to $1.49 last year.
The dividend program probably can't absorb anymore earnings reductions. The payout is currently set at $1.11 per share annually.
Losing ground to T-Mobile?
It looks like AT&T is losing market share to T-Mobile (NASDAQ: TMUS). Its rival in the U.S. telecom market reported 3.08 million postpaid phone net customer additions last year. AT&T reported just 1.7 million postpaid phone adds last year.
AT&T's broadband internet business is an important source of growth that added 1 million new fiber connections in 2024, but this is another operating segment where it is losing market share. The company finished 2024 with 13.99 million broadband subscribers, which was only 213,000 more than it had at the end of 2023.
At just 6.43 million customers, T-Mobile's broadband business is much smaller than AT&T's, but it's growing fast, adding 1.65 million new high-speed internet customers last year.
Why Wall Street is bullish on AT&T
Despite a fourth-quarter report with stagnant top-line numbers, at least a half-dozen sell-side analysts raised their price targets on AT&T following the report.
AT&T may not be adding new customers as quickly as T-Mobile, but it's still one of just three companies with a nationwide 5G network. Business wireline sales fell 10% year over year, but this headwind will be less intense in 2025. The troubled segment was responsible for just 14% of total revenue in the fourth quarter.
With headwinds from its business wireline segment subsiding, growing sales of broadband and mobile services could push AT&T's big needle forward. Fourth-quarter mobility revenue rose 3.3% year over year, and broadband sales are climbing even faster, rising 7.8% year over year to $2.9 billion.
In 2025, AT&T expects mobility service sales to continue rising by a low-single-digit percentage. Now that it has fiber optic cables running past nearly 29 million locations, consumer broadband sales are expected to accelerate and rise by a mid-teens percentage this year.
Still a buy?
AT&T's 4.6% dividend yield isn't enticing when you consider the payout hasn't budged since the company lowered it in 2022. Management hasn't been explicit about when it will begin raising its payout again, but an announcement by the end of 2025 seems likely.
The company finished 2024 with $120.1 billion in net debt. That's a lot, but it isn't unmanageable for a telecom giant with an investment-grade credit rating. Management expects to reduce net debt to a comfortable 2.5 times adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first half of the year.
Last September, AT&T agreed to sell its remaining stake in DirecTV for around $7.6 billion in total. The majority of those payments are expected in 2025 and 2029.
The headwinds from AT&T's business wireline segment and its large debt load will most likely subside gradually. This stock probably won't be a rapid dividend grower, but it could start raising its distribution by a mid-single-digit annual percentage within a couple of years. I wouldn't say it's too late to buy this stock, but you can probably find better options right now.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
