The discounted dividend reinvestment plan allows shareholders to invest dividends into T’s shares at a discount. However, the discount is expected to gradually go down from 2% now to no discount in 2028. If the discount is eliminated in full now, shareholders may not choose to reinvest, which may put further pressure on the company’s share price. DRIP dividends of course do not require cash and T is trying to maintain flexibility.
The risk of a dividend cut is moderate, although the dividends in the trailing twelve months are covered by free cash flow ($1.6B vs. $1.9B). The net debt/EBITDA level is quite high, standing at 5.5x — the highest levels. There is a possibility that T’s management cuts the dividend to pay down debt faster, but it is quite unlikely for now (could change). For now, T expects to reduce debt levels by growing earnings organically. The company has been in a huge capital investment cycle over the last few years. The market likes today's news. We would be OK with T as a 'slow accumulate'. There is still work to be done here, but the company recognizes its issues, at least.
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