Should retirees be worried about the AT&T dividend?

American telecommunications company AT&T (T 0.17%) is a popular dividend stock, especially for retirees who look to the company for its utility-like stability and generous dividend that today yields a whopping 7.4%.

But it’s not all rosy: AT&T recently cut its outlook for cash earnings in 2022. Plus, the stock’s colossal yield might have some wondering if the company can afford its dividend.

I took another look at AT&T’s business after this news to see what dividend investors should expect. You don’t want to miss this.

Why is AT&T in trouble?

AT&T management cut expected free cash flow, a measure of a company’s cash earnings, for the full year 2022 in its second-quarter earnings call. While AT&T originally forecast $16 billion in free cash flow for fiscal 2022, the new figure is in the $14 billion range, a reduction of 12.5%.

CEO John Stankey explained that like many other companies, AT&T is seeing rising costs. This could be due to higher worker wages, more expensive equipment, or a combination of these two issues. Stankey also noted that while the company expects consumers to continue paying their bills, those payments may be slower than usual. This projection indicates that the economy is not performing as well as in previous quarters.

These near-term issues, combined with a general caution about the economy’s performance in the second half of 2022, have led management to revise its free cash flow forecast downward. Notably, however, the company’s revenue outlook remained the same, forecasting low single-digit growth. So what’s the problem ?

Good signs hide under bad news

AT&T is not alone in its struggle to digest the highest inflation in decades; many other companies are also facing this new reality of rising costs. The good news is that AT&T’s real business is doing well otherwise. The company added more than 800,000 new phone lines in Q2 2022 and more than 300,000 fiber internet accounts.

Management increase its revenue forecast for its core wireless business in the full 2022 fiscal year. While the company initially forecast growth of 3% in this segment, it now expects growth of between 4.5% and 5% compared to the previous year. Meanwhile, the top contender Verizon has lost retail phone lines since 2022 have started, despite revenue growth of between 8.5% and 9.5% in the wireless sector.

These two companies combine to hold 75% of the US wireless market, so seeing such different operating results suggests that AT&T is taking business from Verizon right now. AT&T may see some short-term issues hurting its financial performance, but if it can keep adding new accounts like it is doing now, the company should be able to stay the course and continue to grow.

Is AT&T’s dividend in trouble?

Investors probably want to know what AT&T’s reduced free cash flow outlook means for its dividend. After all, dividends are cash expenses for a company, and AT&T is trying to pay down its balance sheet, and not increase it by borrowing to finance investors’ income.

Fortunately, these investors can breathe a sigh of relief. AT&T has 7.169 billion shares outstanding, which means AT&T’s $1.11 per share dividend totals an annual cash outlay for the company of $7.96 billion.

The resulting 57% dividend payout ratio leaves enough financial leeway to pay the payout while servicing the debt on the balance sheet. AT&T significantly reduced the dividend when it split from Time Warner, which made the dividend less burdensome for the company.

In other words, this 7.4% dividend yield is no mirage. Retirees and other dividend investors can own the telecom giant with confidence.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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