Consider Purchasing this Dividend Share Before Its Value Soars Further
AT&T's shares were on an upward trajectory on a particular Monday, and there were plenty of reasons why. The telecom giant had reported earnings that surpassed expectations, reaffirmed its 2025 vision, and informed investors of its plans to slash debt and resume share buybacks later in the year. Despite the post-earnings surge, the stock still traded at less than 11 times its free cash flow forecast.
While the stock might not be as cheap as it was in the past, it's not too late for investors to hop on the bandwagon.
Cashing Out Big Time
AT&T has been actively working on slashing its debt load, which is mostly a remnant of its ill-advised media acquisitions. Soon, the company will sell off its remaining stake in DirecTV, bringing in additional funds and reducing debt further. Between projected free cash flow and earnings from DirecTV, AT&T expects to amass over $50 billion over the next three years.
This extra cash will fund the company's existing dividend payments of $0.2775, which equates to a yield of approximately 4.6%. Although dividend hikes are unlikely in the immediate future, AT&T plans to shell out $20 billion on share buybacks through 2027. Remaining funds, worth $10 billion, may be used for a variety of purposes such as more share buybacks, debt repayment, growth investments, or additional dividends, depending on what best suits the company's needs.
AT&T revealed in its fourth-quarter report that share buybacks would not commence until the first half of the year, with the company holding off until its net debt-to-adjusted EBITDA ratio reaches 2.5. Once that milestone is reached, AT&T can channel cash that used to be put towards debt reduction towards share buybacks.
While some dividend investors may view AT&T's plan to focus on buybacks rather than dividend increases as a letdown, share buybacks can significantly boost earnings per share and potentially push the stock price even higher. At present, AT&T's market value hovers around $170 billion. If the company squeezes out $20 billion through share buybacks at current prices, it will reduce the share count by almost 12%, translating into a nearly 14% increase in earnings per share. The reduced share count could also allow AT&T to raise its dividend per share without increasing its total dividend payout.
The Rally Will Persist
AT&T's stock has been on a roll recently, with a year-over-year surge of around 40%. There are several reasons why the rally might continue in 2025.
First off, AT&T forecasts its free cash flow excluding DirecTV to jump from $16 billion in 2023 to $18 billion in 2027, driven by growth in the wireless and fiber sectors and a savings program slashing annual expenses by over $3 billion.
Second, AT&T's $20 billion share buyback initiative will diminish the share count, amplifying the impact of earnings growth on per-share earnings. If AT&T's current price-to-free cash flow ratio stays the same, the stock could still deliver impressive returns over the next few years. Any increase in investor optimism may push up the stock's valuation ratios and lead to even more substantial rewards for investors.
However, there are potential pitfalls that could halt AT&T's progress, such as intensified promotional activity from competitors or economic downswings. But for long-term investors, buying into AT&T stock now could prove to be a smart move.
With the extra funds from the sale of its DirecTV stake and strong projected free cash flow, AT&T investors have the opportunity to benefit from potential dividend payments and share buybacks.
Given AT&T's forecasted free cash flow growth and share buyback initiative, the company's stock price could continue to rise in the coming years, offering substantial returns for long-term investors.
