AT&T executives are no longer plagued by questions about the long-term prospects for the company’s entertainment business, thanks to their decision to sell Warner Media. Instead, they’re faced with the question that used to confront AT&T before it decided to jump into entertainment: the sustainability of the dividend, which is arguably the most important question for shareholders.

That was top of mind for investors coming out of second-quarter earnings on Thursday, when the telecom giant cut its outlook for free cash flow for 2022 — cash from operations less capital expenditures, plus money AT&T still gets from its stake in DirecTV — to $14 billion from the $16 billion estimated in March. It was little wonder that AT&T shares were down as much as 9.3% in mid-morning trading.

What makes this guidance cut worrisome is that the previous figure was lower than the $19 billion that AT&T produced in 2021 (that number is apples to apples with AT&T’s business portfolio, excluding Warner). And it contrasts with AT&T’s statement when it announced the Warner sale in May 2021 that it expected a payout ratio of 40% to 43% on “anticipated free cash flow of $20 billion plus.” That implies dividends of $8 billion to $8.6 billion, at least.

Remember, this number represents a dividend that had already been “right sized,” as AT&T likes to say, or in plain English, reduced from the $15 billion that the company had been paying before it divested Warner. What’s past is past. But in March, Chief Financial Officer Pascal Desroches slightly modified the previous projection to a payout ratio of about $8 billion, or 40% on next year’s expected free cash flow “in the $20 billion range.”

AT&T hasn’t cut that guidance for next year. But on Thursday’s investor call, CEO John Stankey didn’t sound too certain. Asked about 2023 free cash flow, he talked a lot about rising inflation, which is squeezing some of AT&T’s customers and causing them to pay their bills a little later than they had been. That’s one reason AT&T cut this year’s free cash flow guidance. Stankey said AT&T had a “little bit of a visibility issue” in  assessing the situation for the next few quarters.

And its not just about tardy customers. AT&T’s projections had assumed a decline in its steadily shrinking “business wireline” operations — traditional business phone services — in the “low single digits” based on earnings before interest, taxes, depreciation and amortization. On Thursday, Stankey revised that guidance to a decline in the “low double digits” this year and also pushed back the timing on when that business would stabilize to the second half of 2024 from late next year. That doesn’t augur well for business wireline’s contribution in 2023. 

The good news is that AT&T’s wireless business, by far the biggest source of revenue, is doing fine — at least judging by the standards of the industry, where growth is a relative concept. Mobility revenue rose 5.2% to $19.9 billion in the quarter. There is a cost to that growth, however, including subsidies for new smartphones. That’s another factor that contributed to the 2022 free cash flow guidance cut. Then there’s the heavy capital expenditures that AT&T, like its rivals, has to routinely pour into its network, along with the need to buy new wireless spectrum. That all reduces cash available for shareholders.

Stankey correctly pointed out that “the importance of connectivity in everyone’s lives” makes AT&T’s wireless business highly resilient regardless of economic circumstances. If only investors felt the same way.

More From Other Writers at Bloomberg Opinion:

• AT&T Investors Need More Reassurance: David Wainer

• AT&T Looks Better, Except for Its Stock Price: Tara Lachapelle

• AT&T’s HBO Divorce Isn’t Its Last Hurdle: Tara Lachapelle

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Peers is a Bloomberg Opinion columnist covering tech and media. Previously, he was deputy editor of the Wall Street Journal’s Heard on the Street column and managing editor of the Information.

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