Why it might not make sense to buy AT&T Inc. (NYSE: T) for its upcoming dividend

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Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that AT&T Inc. (NYSE: T) is set to be ex-dividend in just four days. The ex-dividend date is one working day before the registration date, which is the deadline by which shareholders must be present on the books of the company to be eligible for a dividend payment. It is important to know the ex-dividend date because any transaction in the share must have been settled by the registration date at the latest. This means that you will need to buy AT&T shares by October 7 to receive the dividend, which will be paid on November 1.

The company’s next dividend will be $ 0.52 per share. Last year, in total, the company distributed US $ 2.08 to shareholders. Based on the value of last year’s payouts, AT&T stock has a rolling yield of approximately 7.7% on the current stock price of $ 27.16. Dividends are a major contributor to returns on investment for long-term holders, but only if the dividend continues to be paid. Accordingly, readers should always check whether AT&T has been able to increase its dividends or if the dividend could be reduced.

See our latest review for AT&T

Dividends are generally paid out of company profits. If a company pays more dividends than it made a profit, then the dividend could be unsustainable. AT&T reported a loss last year, so it’s not great to see it continued to pay a dividend. Given the lack of profitability, we also need to check whether the company has generated enough cash to cover the dividend payment. If the cash income does not cover the dividend, the company would have to pay cash dividends to the bank or by borrowing money, which is not sustainable in the long run. Dividends consumed 52% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organizations.

Click here to view the company’s payout ratio, as well as analysts’ estimates of its future dividends.

NYSE: T Historical Dividend October 2, 2021

Have profits and dividends increased?

Companies with declining profits are riskier for dividend shareholders. If business goes into recession and the dividend is reduced, the company could experience a sharp drop in value. AT&T was unprofitable last year, and unfortunately the general trend suggests that its profits have fallen over the past five years, which makes us question whether the dividend is sustainable.

Most investors primarily assess a company’s dividend prospects by checking the historical rate of dividend growth. AT&T has generated an average annual increase of 1.9% per year in its dividend, based on dividend payments over the past 10 years.

Get our latest analysis on the health of AT&T’s balance sheet here.

To summarize

Does AT&T have what it takes to maintain its dividend payments? First of all, it’s not great to see the company paying a dividend when it has suffered losses over the past year. On the positive side, the dividend was covered by free cash flow. It’s not that we think AT&T is a bad company, but these characteristics generally don’t lead to outstanding dividend performance.

That said, if you look at this stock without worrying too much about the dividend, you should still be aware of the risks with AT&T. Our analysis shows 2 warning signs for AT&T and you must know them before you buy stocks.

A common investment mistake is to buy the first interesting stock you see. Here you will find a list of promising dividend paying stocks with a yield above 2% and an upcoming dividend.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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