AT&T will offer deals on a new iPhone come Friday as it tries to win more customers in a slowing market. The seasonal promotional is unlikely to hurt its free cash flow—or its dividend.
At a Bank of America conference on Thursday, Chief Financial Officer Pascal Desroches said
AT&T
(ticker: T) expects to deliver $4.5 billion to $5 billion in free cash for the current third quarter ending September. The company also reiterated its full-year free cash flow guidance of $16 billion or more. AT&T set the full-year forecast in January and has continued to reaffirm that level at conferences and calls discussing earnings.
AT&T’s stock closed up 3% to $15.06 on Thursday.
Investors have been worried about AT&T’s free cash flow levels this year as it embarked on a peak capital expenditure cycle, forecasting to pour in $24 billion to build out its 5G and fiber networks. The company had also spent a record $24 billion last year. Higher expenditures eat into free cash flow levels.
An expense line for companies is promotional discounts. The news on cash flow comes a day before AT&T puts the iPhone 15 Pro and Pro Max in stores with a trade-in offer of up to $1,000 in credit. Shoppers can buy the two iPhone 15 models for nearly no cost if they commit to the unlimited voice and data plans instead of the cheaper Value Plus plan.
While AT&T has been offering plans on iPhones since 2007, the promotions come at a pivotal time for the company this year. It underscores the competition for subscribers at play among the big telcos in a cooling market after social distancing during the pandemic led to high penetration. AT&T’s net add of mobility postpaid phone subscribers, or people who pay for phone and other services via a monthly bill, hit 326,000 in the latest quarter, a nearly 60% drop from a year earlier.
The iPhone discounts—
T-Mobile
(TMUS) and
Verizon
(VZ) are offering deals of their own—can boost the subscriber metric and average revenue per user (ARPU) for telcos as more customers feel the urge to pick a more expensive plan. But it can also dent profit margins and free cash flow levels. The latter will likely stayed unhampered at least for AT&T.
Based on Thursday’s announcement, the company would need to generate free cash flow of anywhere between $5.79 billion to $6.3 billion in the fourth quarter of this year to be around its own annual guidance. Analysts tracking the stock expect $6.32 billion in cash flow.
AT&T didn’t respond to questions on the benefit or hit from the iPhone deals.
Free cash flow is an important metric to watch for telecom stocks, which investors love for their premium payouts. AT&T currently pays $1.12 in annual dividends per share, down from $1.35 in 2022 and a five-year average of $1.86, following its separation from WarnerMedia.
Its dividend yield, though, was 7.59% as of Wednesday’s close. That means investors receive $7.59 in dividends each year for every $100 invested in the company’s stock. The
S&P 500
yields around 1.5%.
That dividend, however, has come at a price. AT&T’s stock is down 18% this year as worries about litigation and other costs related to cleaning up lead-sheathed cables following a recent series of articles in The Wall Street Journal made headlines. CEO John Stankey this month said the telecommunications company “doesn’t believe there is a public health crisis” while it works with regulators. Shares of Verizon, which also faces questions on the lead remediation, are down by 13% this year.
Write to Karishma Vanjani at [email protected].
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