Dividendology on $T (Oct 26, 2026)

AT&T stock just crashed. It just fell 7.8% in a single trading day. And even more, if we look in the last month now, it's down by about 16.02%. And we can see three distinct severe drops in the share price.

We know there's one primary reason historically people have bought AT&T stock. And for a lot of the past decade, it was due to the dividends that they paid out.

Now, we can see AT&T right now is yielding about 5.3%. So, it's definitely one of the higher yielders in the S&P 500 and the free cash flow payout ratio is only 42%.

However, there is an issue. AT&T historically had a great track record of growing dividends over time, but in 2022 that dividend got reduced dramatically. The stock the free cash payout ratio had climbed all the way up to around 80% and the company was sitting on a large amount of debt and so the dividend got reduced.

So, the dividends remain stagnant now for the last 3 years or so, but with where the share price currently is, that yield at 5.3%, at first glance, it certainly does look attractive, but of course, we want to see upside in the stocks we potentially add to our portfolio as well.

So, is there now upside with AT&T stock? What's been going on? We also need to answer, is the dividend safe? We'll be discussing the threat of SpaceX as well as assessing the dividend coverage on their preferred shares, which to high yield investors may actually be more attractive.

Now, back here in early October when we saw the stock drop from around $25 a share all the way down to roughly $22 a share, the threat was SpaceX. But then we see another drop right here around October 20th to October 21st.

And this is when they released their latest quarter's earnings.

And here's what's interesting about this. They actually reported beats on top and bottom lines. Revenue was a beat by 670 million. Q3 non-GAAP EPS was a beat by around 5 cents.

Not just that, but they also increased their outlook for 2026 adjusted EPS and lowering its long-term outlook for capital investment.

To put it quite simply, if we look at this report, at least considering the shortrun cash flows, it was a pretty solid report. And they did also point out that while the dividends have remained steady over the last few years, they actually have increased the amount of share buybacks they're performing.

But there's one thing that's really starting to concern analysts. What are we looking at here? Well, down here in the yellow and green, we're looking at fiscal year 2025 cash flows.

Fiscal year 2026 cash flows all the way up until 2030. And here's what's interesting. If you look at 2026 cash flows, you can see analysts have revised their estimates higher. They expect 2026 cash flows to be higher than they originally expected.

But what do you notice as you start to move forward in 2027? A slight small revision. If we look at 2028, another slight revision downward. If we look at 2029, a much larger revision.

And then by 2030, revenue estimates as of October 21st were around 146 billion. Now it's been revised all the way down to 139 billion. So the further out we go, the more revenue estimates have trended downwards.

Why is that the case? Well, it has to do with this sell-off we saw in early October right here. That's the sell-off that happened as a result of SpaceX agreement to acquire Grain Management's nationwide Spectrum portfolio.

So, what's going on here with AT&T stock? Well, basically investors are having to assign a greater probability to another major wireless competitor. And so, while AT&T's cash flows in the short term are by no means under pressure, I mean, they just increased their guidance in the recent earnings report, we can see future cash flows out into 2029 2030 are starting to come into question, and obviously that's going to impact the valuation investors are willing to pay for AT&T stock.

Now, in more recent news, Bloomberg just reported that SpaceX was negotiating access to at least 80,000 US cell sites for wireless networks, and this is including discussions with Ground Castle.

Now, these are just reported negotiations and by no means are completed agreements or an operational nationwide network.

And I do want to point out that it's been reported that estimates show that a national terrestrial network could cost more than $80 billion and obviously take years to develop.

So AT&T at least does have a first mover advantage.

But even with that being said, analysts are drawing into question cash flows in 2029 and 2030 on and beyond. And so naturally, as a result, we've seen a pullback in the valuation multiple.

The valuation multiple expanded quite a bit from 2023 all the way to 2025. In fact, it essentially doubled, trading as high as about 14 times earnings, but now trading at just 8.95 times earnings, which is a little bit below the average over the last 5 years.

And we can see in the last year the PE multiple has drawn back substantially.

Now remember PE multiples are primarily determined by the rate at which companies are growing earnings and how predictable those cash flows are in the future. And so while in the short term the rate at which they're growing earnings has by no means been hampered, the predictability of future cash flows basically from 2029, 2030 and beyond are being drawn into question.

As a result, investors are paying a lower multiple.

Now I do want to be clear. AT&T does have some advantages. They already have their infrastructure installed relative to SpaceX, the customer relationships, obviously the ability to bundle services, while SpaceX has a massive execution challenge on their hands.

So, to be completely honest, it's a difficult situation to assess what these two companies will look like in this sense all the way out into 2030, even though it's really not that far away.

But here's what we can do. We can assess AT&T through the lens of riskto-reward. And it's really not too difficult to do that. And one of the easiest ways to get started is by jumping to our stock valuation sheet.

We'll take a closer look. And let's just look at them through the lens of a dividend discount model. I mean, most people are buying them for the dividend.

Now, basically, what we're doing is valuing the stock based on how much they pay out in dividends and how much that dividend will grow in the future. But typically, whenever we see a potential change in what the future cash flows of a stock could look like, what we do is we look at it through the lens of a reverse dividend discount model.

So, we need to get this price per share the same as the current price. Because if we assume 0% dividend growth moving forward, the stock is only worth around $21 a share. So let's start to bump these numbers up.

At about 4%, we get to $25.65. That's well above this. We pull it back to around 3%. We get very close to the current share price. So basically, that's what the market is pricing in. 3% annual dividend growth.

Now, if we take a closer look at those dividend metrics, here's what we can see right now. Free cash flow is easily covering those dividend payments. The free cash payout ratio has been in that 40 to 42% range over the last few years, ever since they cut the dividend payments.

What does future free cash flow growth actually look like? Well, this is something that they actually outlined in the recent earnings call. They said in 2026 they expect around 18 billion plus of free cash flow. 2027 19 billion and by 2028 around 21 billion in free cash flow.

So for reference, 21 billion in free cash flow if they were paying out the same amount in dividends would lower the free cash flow payout ratio to around 39%. So not a massive reduction in the payout ratio, but they could continue to grow the dividend at a slow rate.

Now, something else we do have to keep in mind is they have been increasing the amount they're allocating to share buybacks over the last few quarters while the dividend has remained the same.

So you could argue there is some more potential to grow the dividend.

But here's the huge issue, at least in my opinion. This is still a company with a lot of debt. Net debt is sitting at about $150 billion. Their net debt to adjusted EBIT DA has actually increased over the last few quarters.

It's now at $3.13x. This reduces financial flexibility.

Remember, we have to always think of things from a capital allocation perspective. And so, while a company can also buy back shares, pay out dividends with free cash flow, they can also reduce debt.

They can reinvest back into the business, do mergers and acquisitions. They're all interlin to some degree.

Now, with that being said, going back to how fast can they actually grow the dividend, we can see revenue is expected to grow in the low singledigit range annually. Adjusted EBITDA growth in the upper portion of the 3 to 4% range in 2026, improving to 5% or better in 2028.

So, they're making the argument that adjusted EBIDA growth could get up to about 5% moving forward. If that's actually the case, then you could make the argument that this is a stock that could grow dividends faster than 3% moving forward, implying some upside, maybe 10% upside if they get to 4% dividend growth, maybe even as much as 22.5% upside.

Right now, the average analyst is giving them about 34% upside with a price target of $2810 per share. But here's the issue. The issue with any potential investment is lack of predictability in future cash flows.

And that's really what's being drawn into question over the last month for AT&T and the market is obviously recognizing this.

So if you're looking at this stock, you're looking at that nice 5.3% yield and you feel like it could potentially be a good addition, but you have concerns. What do you do? Well, again, remember earlier we talked about looking at every investment through the lens of riskto-reward.

There's certainly some potential upside with AT&T if things play out well, but there is also an increased risk factor now that SpaceX is trying to compete, especially when you consider AT&T's debt levels.

This is why I think at this price, the preferred shares actually are quite a bit more interesting, more compelling, at least from a risk-to-reward perspective. Now, the preferred shares for AT&T right now are yielding around 7.64%, close to 7.7%.

So the yield is certainly quite a bit higher than the common equity, but what does it actually look like from a risk-to-reward perspective?

Well, this is where things get interesting and I started to dive into dividend coverage at a much higher level. Now, we already saw that the free cash payout ratio in 2026 based on forecast and annualized dividends is going to be around 42%.

Basically in line with what we saw for 2025 at 42.07%. To be fair, that is very healthy dividend coverage. It's covering the dividends with free cash flow about 2.37 times over.

But take this into perspective. The dividend coverage for the preferred shares, class A and class C, is sitting at 125.76 times. They're using just 0.8% of their free cash flow to pay out the preferred shares.

So, you can lock in a very safe 7.7% yield with the preferred shares for AT&T.

And while obviously you wouldn't get to partake in as much of the upside, you do limit your downside to a much greater degree. Now, that's not to say that in the short run we can't continue to see the preferred shares fall.

And the main reason that could potentially be the case is obviously what's going on in the fixed income market. The yield curve relative to one year ago is definitely expanded considerably.

And as Treasury yields rise, it's going to put downward pressure. It's going to put gravity on those preferred shares. There's no doubt that's the case.

And at the exact same time, we can see when we look at the Fed tracker here on treasurybonds.com that there's right now a relatively high likelihood that we get a rate hike in December.

So, I'm well aware of the risk with preferred shares. But those risks do appear to be more short-term risk in my opinion.

If you're looking to lock in a solid safe yield of close to 7.7%, then the preferred shares for AT&T definitely seem like a more compelling case versus the common equity and perhaps even better from a risk-to-reward perspective.