After AT&T (NYSE:T) slashed its dividend in half in 2022 following the spin off of its entertainment division into Warner Bros Discovery (NASDAQ:WBD), the stock cratered as it lost its former Dividend Aristocrat status, having previously raised the payout for 36 consecutive years.

Ma Bell was long thought of as a “widows and orphans” stock because of the reliability of its steadily rising dividend, but the $85 billion acquisition of TimeWarner in 2018 saddled the telecom giant with so much debt that it was no longer sustainable. 

Although other dividend royalty have gone on to raising their dividend again soon after cutting it — 3M (NYSE:MMM) hiked its dividend 4% in February, less than a year after halving it  — AT&T has not followed suit 

The telecom still carries a significant debt load despite paying down a good portion of it over the past three years. In its just-reported first quarter earnings announcement, AT&T had $117.3 billion in long-term debt, or a reduction of $32 billion in net debt since the beginning of 2020. While the carrier has not said it is ready to raise its dividend again, it may very well do so soon.

Returning to form

AT&T had lost its step over the years, losing ground to rivals T-Mobile (NASDAQ:TMUS) and Verizon (NYSE:VZ). The TimeWarner purchase had muddled its focus as it sought to mix entertainment with telecommunications.

Now, because it is narrowly focused on its primary business once more, AT&T is quickly gaining ground and market share.

The first quarter saw AT&T add more customers to its services, with AT&T Fiber notching its 21st consecutive quarter of 200,000 or more net additions. Although its business wireline operations remain in decline, the telecom enjoyed posting 324,000 postpaid net additions, likely stolen from Verizon, which reported losing 298,000 postpaid customers in Q1.

AT&T reported revenue grew 2% to $30.6 billion for the period, just ahead of analyst expectations of $30.4 billion. Earnings of $0.51 per share were up 8.5% year-over-year, and in line with Wall Street forecasts. 

More interesting for income investors is that AT&T hit its target leverage ratio of 2.5x in the quarter, presumably sooner than expected.

Hinting at what’s to come

During the carrier’s fourth quarter earnings conference call, CFO Pascal Desroches said AT&T expected to hit the target in the first half of 2025. That it was already operating at that level by the end of Q1 suggests it reached its goal sooner. 

While Desroches said the company intended to maintain its dividend payment at $1.11 per share, but start buying back stock, possibly as much as $10 billion worth in the second half of the year, investors just might see a dividend increase sooner than many believe.

AT&T has a three-year, $40 billion plan to return capital to investors, largely split evenly between dividends and stock buybacks. However, it has the flexibility available to deliver an additional $10 billion in capital returns to investors. 

Management says it could also use the money for strategic purposes or to further reduce its debt, but even a modest increase in the payout would reward shareholders who stood by the telecom through this fairly ugly period. 

Key takeaways

AT&T is a cash-generating machine. It expects to produce $16 billion in free cash flow in 2025, which easily supports the $8 billion it spends on its dividend payments. Management also expects to produce $1 billion more in FCF in each of the following two years, bringing its total to $18 billion by 2027.

The dividend currently yields 4.1% annually, an attractive rate for income investors. Shareholders are also enjoying capital appreciation as T stock is up 18% so far this year with shares 62% higher over the last 12 months.

With its business firing on almost all of its cylinders, its debt load now under control and declining, FCF rising, and the flexibility to do more for shareholders, investors might not have to wait so long to see Ma Bell ring up a new dividend increase for them.

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