AT&T Expects to Return Another $20 Billion in Cash to Investors by 2027 (Just Not Through a Higher Dividend)

AT&T (NYSE: T) recently unveiled its updated strategic plan, providing investors with financial guidance through 2027. The telecom giant expects to generate growing free cash flow during that period, much of which it plans to return to shareholders.

However, the additional cash returns won't come from increasing its high-yielding dividend (nearly 5% yield). Instead, the telecom company plans to start buying back boatloads of its stock.

The repositioning is complete

AT&T has spent the past several years repositioning its business and balance sheet. It has shed non-core assets like its media division and stake in DIRECTV. It has used its cash flow to invest in expanding its mobile and broadband businesses while directing any excess free cash flow after dividends to repaying debt.

The telecom company's strategy is working. It expects to grow its revenue at a low single-digit rate over the next three years. It also anticipates that its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will grow by 3% or more each year during that period, supported in part by the expectation that it will capture more than $3 billion in annual cost savings by 2027. That positions the company to generate robust and growing cash flow.

AT&T expects to reinvest around $22 billion of its annual cash flow into capital investments in the 2025 to 2027 time frame. That has it on pace to produce a growing stream of free cash flow. The telecom giant expects its free cash flow to total more than $16 billion next year. It sees its free cash growing by over $1 billion annually after that, reaching more than $18 billion by 2027.

The company also remains on track to achieve its targeted leverage ratio of 2.5 times in the first half of next year. It expects to maintain that level through 2027.

Ramping up the cash returns

AT&T expects its plan will provide it with about $50 billion of financial capacity over the next three years. That will come from its growing free cash flow, the expected cash infusion from selling its 70% stake in DIRECTV ($5.4 billion in mid-2025), and balance-sheet capacity by maintaining its leverage target.

The company plans to return more than $40 billion of this freed-up financial capacity to investors over the next three years. The base return will come from maintaining its current dividend payment of $1.11 per share ($0.2775 each quarter). That payment alone will add up to over $20 billion in cash heading to shareholders during the plan period.

The remaining cash return will come from share repurchases. The company's board has authorized an initial $10 billion share-repurchase program that it expects to start once it reaches its leverage target next year. It anticipates completing that program by the end of 2026. AT&T expects to authorize another $10 billion in share repurchases in 2027.

While dividend investors might be disappointed that AT&T isn't increasing the payment, the buyback makes a lot of financial sense. AT&T currently trades at about 10 times its forward price-to-earnings (P/E) multiple. That's a more than 50% discount to the broader market, considering that the S&P 500 trades at 23 times forward earnings. With a market cap of around $165 billion, AT&T could retire more than 10% of its outstanding shares, which would boost its earnings per share by a similar amount.

The company expects to have another $10 billion of incremental financial flexibility during this period. It could use that money for additional organic investments, acquisitions, debt repayment, dividends, or share repurchases.

Rewarding shareholders for their patience

AT&T's turnaround plan has taken several years. However, it has finally reached the inflection point where it can start returning more cash to investors. While that won't come through a higher dividend, the company's plan to repurchase stock could enable it to produce a higher total return for investors in the long run, given how cheap its shares are these days. Meanwhile, investors will still collect a very high-yielding dividend supported by its strong cash flow and balance sheet. Because of that, it's ideal for those seeking a bond-like income stream to go along with what could be some nice stock-price appreciation as its buyback gains steam.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.