Competition from T-Mobile has forced major carriers in the U.S. to offer subscribers unlimited data plans. If that weren’t enough, cable companies like Comcast Corporation (NASDAQ:CMCSA) and Charter Communications, Inc. (NASDAQ:CHTR) are looking to offer customers cellular data and phone services.
AT&T’s Balance Sheet: As a result of AT&T’s big acquisitions, it’s debt has gone up. T’s debt-to-equity ratio went up from 0.82 in 2013 to 1.00 in 2016. The company bought DirecTV in 2014 for $48.5 billion, issuing $17.5 billion in bonds in 2015 to finance the deal.
Click to Enlarge Last year, AT&T purchased media giant Time Warner Inc (NYSE:TWX), which owns CNN, for $85 billion. This deal, which Wall Street issued $40 billion in debt to finance, makes T one of the most debt-laden companies in the world. The combined company will hold $175 billion in debt, the New York Times says this making AT&T “the largest nonbank corporate issuer”. Rating agency Moody’s issued a warning and put AT&T on a watch list. A SeekingAlpha contributor wrote that the combined company would have a tangible book value of negative $185 billion.
This high debt load could endanger the AT&T dividend, which is one of the main arguments given by the stock’s bulls.
Lost Straight Path to Verizon: Carriers like AT&T are racing to transition from 4G to 5G networks, and T plans to roll out 5G in two cities this year, Austin and Indianapolis. But Verizon successfully outbid AT&T for Straight Path Communications Inc (NYSEMKT:STRP), which holds high-frequency spectrum licenses covering most of the United States. This will give Verizon an advantage over T in the race to 5G, helping it develop a fast and reliable network, while AT&T will have to look elsewhere.
Bottom Line on T Stock
When you look at the whole picture, AT&T stock doesn’t look so enticing.
One of its greatest strengths, its dividend, looks fragile when examined closer.
First, can T sustain a 5% dividend yield given its mountain of debt and the need to invest in 5G technology? InvestorPlace contributor Aaron Levitt warned that if the company’s push into media fails, the AT&T dividend would be in jeopardy.
Also T has piled up this debt while interest rates were relatively low. If interest rates rise and the company has to refinance its debt at higher rates, what might happen? This could be dangerous
And some think dividend stocks are a bubble. Interest rates were very low from 2009 on, meaning that if you bought a bond, you wouldn’t get much of a return. This led to yield-seeking behavior among investors who normally would have invested in bonds, but instead turned to dividend stocks like T as an alternative.
After all, AT&T’s 5% dividend yield beats the yield on a 10-year note.
If interest rates rise, perhaps some of that money will flow out of T stock and into newly issued bonds offering higher returns.
And low valuation alone isn’t a reason to buy AT&T stock. A stock could always be valued low for a good reason; the market isn’t always wrong. Warren Buffett wrote in 1989 that “It’s far
better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Ultimately, AT&T’s pros don’t look so strong, while the cons look like real concerns. For these reasons, I would stay away from T stock.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.