After years where it husbanded resources in favor of paying dividends, AT&T (NYSE:T) was finally able to break out of its telecom box this week and buy Time Warner, now renamed WarnerMedia.
The company is following up by trying to re-create the infrastructure of Cloud Czars Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) and Facebook (NASDAQ:FB), buying the rest of Internet video company Otter Media and moving to buy the AppNexus advertising platform.
Old media is cheering these moves. They say ads on branded content bring “quality” to brands advertising there. They say the moves assure the dividend and make the stock a buy.
I’m not so sure.
CEO Randall Stephenson talks a good game, of reinventing AT&T for the cloud era. But talk of investing $1 billion in tax cut money per year won’t make AT&T a cloud player.
What Cloud Needs
AT&T has spent the last two decades missing the biggest opportunity of the century.
While start-ups like Facebook spent the $1 billion per quarter, and more, needed to build networks of cloud data centers ahead of demand, AT&T paid dividends. The result is that the “phone company” is barely a player in networking today, with the new Cloud Czars laying the undersea cables phone companies were once known for.
Stephenson has been making deals with old-line tech companies such as Oracle (NASDAQ:ORCL) and off-loading public cloud traffic to Amazon.com (NASDAQ:AMZN) and its Amazon Web Services. Analysts who should know better have applauded.
The business cloud market has been lost to Amazon, Alphabet and Microsoft (NASDAQ:MSFT). AT&T now lacks the cloud assets needed to fully capitalize on its huge content buy.
Depending on Content
AT&T has always been a political player. It spends about $18 million each year on lobbying and it has put $3.6 million into political contributions so far in the current cycle. This dramatically underestimates its efforts in state capitols around the country, where it often controls both parties.
Now, with CNN, AT&T has an even higher public profile, which can be a double-edged sword when some recipients are revealed. AT&T also has a huge “Astroturf” machine, backing “grassroots” groups which are anything but to further its governmental aims.
Despite all this, AT&T today has a market cap of $237 billion. Facebook, the smallest of the Cloud Czars, is worth $571 billion. The lesson should be clear — technology matters more than media, more than lobbying, more than anything.
Debt Must Be Paid
Moody’s has already downgraded AT&T debt to Baa2, two steps above junk, saying its $180 billion debt load will be difficult to service as interest rates rise.
AT&T had $160 billion in revenue in 2017, and Time Warner had $31.3 billion more. The combined net income of the companies was almost $31 billion.
From that, AT&T needs $14.6 billion to pay its $2-per-share annual dividend, plus at least $5.4 billion to service the debt, assuming an average interest rate of 3%. Then there’s an estimated $25 billion in capital spending this year, much of it to maintain a wireless plant that must be adapted to 5G technology.
The numbers just don’t add up, which is why the price-to-earnings ratio for AT&T is now 6.5 and the yield to current investors is 6.17%. AT&T faces new competition and has just picked a fight with the Cloud Czars.
It’s a high-wire act and investors are expecting the company to fall.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T, MSFT and AMZN.
