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Here's My Top Dividend Stock For 2025
Shares of telecom giant AT&T (NYSE: T) have soared about 35% so far this year, delivering market-beating returns to investors after years of trouble. The company's failed efforts to become a media conglomerate, which piled on debt through pricey acquisitions, have been largely unwound. The pending sale of its 70% stake in DIRECTV, set to close in the second half of 2025, will put a bow on the effort to get out of the media business for good.
As AT&T narrowed its focus to what it does best, wireless and broadband, the stock has rebounded. With strong free cash flow generation, steady wireless growth, an improved balance sheet, and an opportunity to greatly expand its fiber network, AT&T stock looks poised to have a great 2025 as well.
Less debt, a stable dividend, and share buybacks
AT&T's failed media acquisitions burned through capital and destroyed shareholder value, but its efforts to undo those bad deals have improved the balance sheet over the past few years. Since 2020, AT&T has reduced net debt by about $25 billion. A lower debt load takes some pressure off the balance sheet, allowing the company to make the investments it needs to make in its wireless and fiber networks while still paying a generous dividend to investors.
Over the next three years, AT&T plans to spend around $20 billion on dividends and buy back roughly $20 billion of its own shares. AT&T hasn't increased its dividend since 2020, and it cut the dividend two years ago as part of its WarnerMedia spin-off. While dividend growth will likely be slow going forward, the company now has the financial flexibility to start growing the dividend again. AT&T may prioritize share buybacks instead, which could make sense given the stock's still-cheap valuation.
Even with a stagnant dividend, AT&T stock currently yields about 4.9%. That's historically on the low side for AT&T, so a dividend hike could be on the table in 2025.
Free cash flow and fiber opportunity
By selling its DIRECTV stake, AT&T will lose a source of free cash flow. However, free cash flow is expected to grow at a healthy rate over the next few years, excluding the contribution from DIRECTV.
For 2024, AT&T expects to generate free cash flow of around $15 billion after backing out DIRECTV. This metric should grow to at least $16 billion in 2025 and at least $18 billion in 2027. With a current market capitalization of around $163 billion, the stock trades for about 9 times that 2027 free cash flow guidance.
Continued growth in the wireless business will help drive this free cash flow generation, but the fiber business will also contribute. AT&T sees an opportunity to double its fiber customer base in the long run as it aims to pass 50 million locations by the end of 2029.AT&T's fiber network is expensive to build, but maintenance costs are around 35% lower than the legacy copper network's.
A secondary benefit of growing the fiber customer base is the opportunity to cross-sell wireless services. While AT&T's wireless customer base is already sticky, customers with both wireless service and fiber service are even less likely to switch providers.
In AT&T's fiber markets, the company has seen postpaid phone churn rates about 25 basis points lower than those of non-fiber networks. In households with both fiber and wireless, the fiber churn rate for fiber is 45 basis points lower. Those small improvements spread across an enormous customer base are a big deal for AT&T's bottom line.
A great stock for 2025
AT&T has made tremendous progress over the past few years in undoing its costly media-related mistakes. The AT&T of today is leaner and more focused on its best opportunities, primarily 5G wireless and fiber. While the company's forecast could be upended by an economic downturn, its strategy appears sound.
With a near-5% dividend yield and a valuation that's still attractive, AT&T is a fantastic dividend stock to buy for 2025 and beyond.
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Timothy Green has positions in AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
