AT&T ticks up as mixed report still eases some cash worries (NYSE:T)

AT&T stock (NYSE:T) was about as mellow as can be at midday Wednesday, trading fractionally higher after a mixed second-quarter report that nonetheless seemed to ease some worries from dividend-focused investors over cash.

As was the case last year, early-2023 results spooked some investors over cash flows coming in light (this year, about $1B in free cash flow in the first quarter vs. expectations for $2.6B).

But second-quarter free cash flow easily topped estimates, landing at $4.2B vs. expectations for about $3.8B. And the company reiterated its confidence in hitting $16B-plus in free cash flow for 2023.

That second-quarter result was due to higher cash from operations even though capital investment was also slightly ahead of pace.

“For the first half of 2023 compared to the first half of 2022, free cash flow was up about $1B and we expect our cash generation to accelerate from here,” said Chief Financial Officer Pascal Desroches on AT&T’s earnings call. He noted that first-half growth came despite about $8B lower DirecTV cash distributions and about $7B in lower net impact of receivables sales.

And once again, the cash flow will be weighted to the fourth quarter, with about $11B left to go to hit that $16B target.

“One, we expect capital investments to be about $1B lower in the second half of the year after peaking in the first half,” Desroches said. “Two, we anticipate device payments to be about $4.5B lower than the first half of the year. Three, the first half of the year included more than $1B of annual incentive compensation payments that won’t repeat in the second half. Four … we expect full year adjusted EBITDA growth of more than 3%. And lastly, we expect other working capital improvement of roughly $1B billion in the second half of the year relative to the first half of the year.”

The cash flow saw upside from higher EBITDA and lower headwinds from working capital, cash taxes and cash interest, Evercore analyst Vijay Jayant noted, adding that the modest DirecTV distributions were in line with expectations.

Elsewhere, net adds in wireless and broadband were in line with management’s intra-quarter commentary, Jayant said, and wireless service revenues were in line while softness in business wireline was mitigated by “modest upside” at consumer wireline.

Neutral KeyBanc acknowledged the mixed results but noted “they were better than updated guidance for 2Q23 that the Company gave late in the quarter, and we do not see any big negative surprises.”

Citi is Neutral as well, but highlighted some upside in “encouraging and positive trends for postpaid phones and fiber subscriptions.” The wireless landscape is showing “some ongoing signs of stabilization, while category postpaid growth is benefiting from greater business contributions than we would have expected.”

Hitting that cash flow target isn’t just about securing the highly valued dividend. Desroches noted on the earnings call that “from now until the first half of 2025, we expect to increasingly use our free cash flows after dividend to reduce debt, and at a faster pace.”

By the end of 2023, “we expect to reduce net debt by around $4B, excluding any potential FX impacts which will put us at about the three times range for net debt to adjusted EBITDA. This puts us on our trajectory to achieve the targeted 2.5 times range in the first half of 2025,” Desroches said.