The last time I wrote about AT&T Inc (NYSE:T) was mid-September. In that piece, I suggested the 5.2% yield of AT&T stock was hardly worth it.

My biggest concern about AT&T is the rate at which it’s grown its debt over the past 12 years; 17.2% annually, almost double its rate of return in the same period. That is a very troubling sign that the company’s not delivering nearly enough for shareholders given the increased risk profile it’s carrying into a rising-rate business environment. 

In my opinion, AT&T stock will be lucky to duplicate its 9.2% annualized total return over the next 12 years, making its 5.2% yield anything but risk-free.

Naturally, this offended some of the more sensitive AT&T longs and I heard from one of them.

“If you are saying a 5.13% dividend yield is stupid, would you please be willing to find another topic to write about. You are an embarrassment to real writers and more importantly investors,” wrote my newfound friend. “This is not Blue Chip Stamps. This is the most proliferate utility communications company in the world. “Did you get $20 bucks for this article or what?”

I especially liked the last line in this short and succinct email. Well, for anyone who’s genuinely concerned about my welfare, I did indeed get paid more than $20.

Logic Trumps Emotion

That’s odd wording, having Trump and logic in the phrase, but when it comes to investing it’s true.

You might not like the fact that I have my doubts about AT&T stock replicating its past efforts, but that shouldn’t stop you from at least considering why I’m thinking this way. You wouldn’t jump off a cliff because everyone else was doing it so why is it stupid for me to question the future success of this particular investment.

To begin with, let’s revisit an April 2017 report from the International Monetary Fund (IMF) that looks at global financial stability. 

As I noted earlier this week, in discussing Valeant Pharmaceuticals Intl Inc (NYSE:VRX), the IMF paints a favorable economic picture, but warns against excessive financial risk-taking.

“Tax cuts in the United States in the 1980s coincided with an increase in financial risk-taking, abetted by a broad rollback of regulations. Similarly, a tax holiday for offshore unremitted profits in 2004, amid financial deregulation that started in the 1990s, was followed by a surge in financial risk-taking,” stated the IMF report. “In general, increased financial risk-taking is associated with pronounced leverage cycles that gradually build up and end abruptly in recessions, as for example in both 2001 and 2008.”

Currently, the median net debt of S&P 500 firms is close to historical highs at 1.5 times earnings. In an SEC filing, AT&T says its net debt will be 2.5 times adjusted EBITDA by the end of the first year after it closes the Time Warner Inc (NYSE:TWX) acquisition.

Does it concern you that AT&T will have leverage that’s two-thirds higher the median of the S&P 500 — a number that itself is very close to a record?Yes, I know the standard argument that interest rates are lower, blah, blah, blah. AT&T even says in its elevator pitch that the timing of this deal couldn’t be better given the low-interest rate environment.

You can’t deny the facts.

AT&T is going to have $175 billion in debt. It currently pays an average of 3.75% on its debt. Let’s assume the interest rate it pays stays around that level — it will cost the company $6.6 billion in the first year. A 1% increase in the rate paid equals a $1.7 billion increase in the payments to $8.3 billion annually. A 2% increase to 5.75% would mean a 53% bump to $10.1 billion.

Bottom Line on AT&T Stock

There’s no question that AT&T is buying some excellent media assets that will increase its already-healthy free cash flow which is the bucket from which dividends are paid.

However, if we were much earlier in the credit cycle (say, in 2012) and investors were demonstrably more bearish about the takeover, I’d be a lot more enthusiastic about Time Warner being a game-changing move.

The fact that most dividend investors don’t seem to be alarmed by AT&Ts increased leverage suggests individual investors have forgotten what happened in 2008.

I might be stupid to think AT&T’s 5.2% yield is anything but risk-free but for those who like to consider both sides of the argument, it’s safe to say you’re more than a little worried about AT&T’s ability to execute the integration of Time Warner.

 And, you’d be in the minority.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.