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Shares of telecom giant AT&T (NYSE: T) were surging on Monday for good reason. The company reported estimate-busting results, reiterated its 2025 outlook, and updated investors on its debt reduction efforts and its plan to restart share buybacks later this year.
Even after the post-earnings rally, AT&T stock trades for less than 11 times the company's free cash flow guidance. While the stock isn't nearly as cheap as it was at times over the past few years, it's not too late for investors to jump aboard.
Returning $40 billion to shareholders
AT&T has been focused on reducing its debt over the past few years. A big chunk of that debt is the legacy of the company's misguided media acquisitions, which have now been largely unwound. The last piece of AT&T's media exit will be the sale of its remaining stake in DirecTV, which is set to close later this year.
Between free cash flow and proceeds from the DirecTV sale, AT&T expects to have more than $50 billion at its disposal over the next three years. That will support AT&T's current quarterly dividend of $0.2775, which works out to a dividend yield of about 4.6%. AT&T plans to maintain the current level of dividend payments, so dividend increases seem unlikely in the near term. The current quarterly dividend will eat up a bit more than $20 billion over the next three years.
Instead of boosting the dividend, AT&T will allocate $20 billion for share repurchases through the end of 2027. Another $10 billion will be a wild card and may be used for growth investments, debt repayment, additional dividends, or more share buybacks, depending on what makes the most sense.
AT&T disclosed in its fourth-quarter report that it wouldn't start share buybacks until the second half of the year. The reason for the delay is that the company is waiting for its net debt-to-adjusted EBITDA ratio to reach its target of 2.5. Once that happens, AT&T can shovel cash that was previously being used to reduce its debt toward share buybacks.
AT&T's capital allocation plan, which prioritizes buybacks over dividend increases, may be disappointing to some dividend investors. However, with AT&T's valuation still attractive, share buybacks can provide a significant boost to per-share earnings and potentially drive the stock higher.
AT&T is valued at about $170 billion, so $20 billion in buybacks at today's prices would reduce the share count by nearly 12% and raise per-share earnings by close to 14%. These buybacks will also reduce the total amount of dividends AT&T is paying out, since there will be fewer shares. While a dividend increase over the next three years isn't a sure thing, AT&T could raise the per-share dividend without increasing its total dividend payments thanks to a declining share count.