AT&T has upside as sustainable dividends and ~10% earnings growth support valuation despite current deleveraging needs.

Now, we come to AT&T, who just a few years ago was one of the most popular dividend stocks on the market. But, we can see in the last year, down by 14% and in the last 5 years, down by about 8.78%.

And I remember making videos on this stock around four, maybe five years ago, when they ended up having to cut their dividend. It was right in the middle of when everybody was talking about how great of a dividend stock they were.

Well, if we jump over to our dividend breakdown sheet, the data will load in and we can still see they're still yielding about 4.4% but previously they had a history of growing those dividends.

They slashed the dividend pretty significantly almost by 50%

but one of the things we'll now notice is free cash flow is covering the dividend pretty comfortably. The free cash flow payout ratio before the dividend cut was sitting at about 79.5% which yes, is sustainable but I'll tell you why that was an issue in a moment.

But we can see after the dividend cut it's sitting much closer to about 40% and as of the end of 2025 at just 42%. So, the company is only using 42% of their free cash flow to pay out dividend.

That puts their dividend in a much more sustainable position

Remember what one of the options is with free cash flow and capital allocation. It's strengthening the balance sheet. It's paying down debt. Now, that's particularly important for AT&T because they still have an incredibly large debt balance.

126.4 billion in net debt. That's obviously a little bit over leveraged and management has stated that they're targeting a leverage of approximately 2.5 times EBITDA over the next several years and obviously to get to that level, they're going to have to use capital to deleverage.

So, naturally it's a very good thing the free cash flow payout ratio is now substantially lower. That's why it wasn't sustainable at 80% because the debt just kept growing higher and higher. Obviously not something you want to see.

Now, with that being said, we can see AT&T's valuation multiple right now sitting at about 10.45. It's come down quite a bit particularly in the last year when it peaked at about 14 times earnings.

So, what's a reasonable valuation multiple for a company like AT&T, a very slow growing earnings company? Well, if we jump over to earnings estimates, one of the things you'll notice is projections are actually quite a bit stronger than you would expect, particularly over the next 3 to 4 years.

Analysts are guiding towards close to 9 to 10% earnings growth. It's actually very impressive.

And so, ultimately, if we jump over to our valuation sheet and take a look at AT&T, jump over to the dividend discount model. Again, we're basically valuing the stock based on how much it's going to pay out in dividends and how much that dividend will grow in the future.

But, what's really interesting is right now, if you apply a 0% dividend growth rate to AT&T, the stock is only worth about $13 per share. So, ultimately, over the long haul, the market is pricing in dividend growth, despite the fact we might not see any dividend growth over the next couple of years as the company continues to deleverage.

What we can see is if we bump dividend growth up to about 3%, all of a sudden we get to $20, close to $21. If we bump it up to 4%, we get very close to the company's current share price.

So, essentially, this is what the market is pricing in over the long term.

And it seems aggressive at first glance for a stock like AT&T, until you consider the fact they're using less than half of their free cash flow to pay out dividends, and at the exact same time, earnings growth over the next 3 to 4 years is projected to be close to 10%.

So, if they achieve this level of earnings, they hit their deleveraging target, then the nice starting dividend yield is certainly a great place to start. But, on top of that, it does look like there's some upside.

Even if we look at the average analyst price target right now, it's sitting at about $29 per share, implying 15% upside.