Telecom company AT&T (NYSE:T) fell sharply last week by 10%. Its earnings report didn’t look bad and it even beat expectations. Adjusted earnings of $0.65 were well above the $0.61 Wall Street was looking for. And revenue of $29.64 billion was also higher than estimates of $29.55 billion.
But the big problems were that the company was downgrading its forecast for free cash flow. It also said customers were getting slower at making payments. Those are both concerning signs for a company with a high yield, as it could put pressure on its payouts.
With the decline in price, AT&T’s dividend is now yielding more than 6% annually. That’s well above the S&P 500 average stock, which pays 1.7%. The dividend costs AT&T about $8 billion per year in cash. Management expects its free cash to be approximately $14 billion this year, and by next year, that should rise to $20 billion. The good news is that despite these latest headwinds, the dividend may remain safe for the foreseeable future.
But investors are clearly hesitant on the stock as AT&T trades at a forward price-to-earnings multiple of just over seven, which is a steep discount. The positive is that at its low price point of around $18 per share, there could be more upside than downside risk. Multiple brokerages lowered their price targets for AT&T last week, but even the lowest one was $20, with the higher targets up at $24.
Although there’s some risk here, AT&T could make for a good contrarian buy. And its 6% yield does look safe for the time being.