AT&T (NYSE: NYSE:T) is drawing investor interest following a robust earnings report, despite the telecom industry's fierce competition and concerns over rising Treasury yields. The company's latest quarterly earnings surpassed expectations with $0.64 in adjusted EPS on total revenue of $30.4 billion. This positive trend continues even with AT&T shouldering a considerable $138 billion debt burden and interest expenses.
The company's substantial 44% market share in the U.S. telecom sector, high 7.4% yield, and relatively low valuation trading at six times earnings, have contributed to its appeal. These factors, coupled with a large 5G network and two-quarters of positive Free Cash Flow (FCF) growth, suggest that AT&T's stock may be undervalued.
Despite previous dividend cuts, AT&T's Q2 and Q3 FCF growth, including a 17% FCF margin, indicate that further cuts may not be necessary. However, the effect of interest rates on its large variable rate debt remains a critical factor for future performance.
While AT&T's recent quarter saw an increase in revenue, cash from operations, and FCF, operating income and net income were down. Still, the company's margins remain healthy despite these challenges. The company faces significant hurdles due to rising interest rates impacting its debt, declining smartphone sales affecting both product and service revenues, and intense price competition in the telecom sector.
In other news, Southern Copper Corporation (NYSE:SCCO) has declared a dividend doubling to $1.00 per share from last year's $0.50. This move has sparked concerns about sustainability due to the company’s history of dividend cuts and cash flow exceeding dividends. If SCCO maintains its trend of prioritizing high dividends over reinvestment, it could face challenges sustaining these payouts with declining cash flows.
The company's EPS is forecasted to grow by 11.3% in the next year, but a constant dividend growth rate could push the payout ratio to 111%, posing a financial stability risk. Despite an 18% average growth rate since 2013, SCCO's dividends have shown volatility, including at least one reduction. A significant portion of SCCO's earnings, which have grown annually at a rate of 23% over the past five years, is paid out as dividends. This pattern could jeopardize the long-term viability of SCCO's dividends if it persists.
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