While no financial numbers were released in its July 11 press release, AT&T (NYSE:T) is now another player in augmented reality (AR) and a potential buy for those interested in AR stocks. What it will do for AT&T stock remains to be seen.
Hot off its $85 billion merger, the wireless giant has made a strategic investment in Magic Leap, whose Magic Leap One AR goggles, are set to go out to developers this summer.
The key to its announcement isn’t the investment by AT&T but rather the exclusive distribution agreement it’s wrangled from Magic One making it the exclusive wireless retailer to sell the AR headset once they’re ready for public consumption.
A Big Distraction for AT&T Stock
I’m not a fan of AT&T stock.
I’ve said on several occasions over the past year that the level of debt it’s piling on makes it an easy casualty should interest rates continue to climb higher:
“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.”
Needless to say, I don’t see how the addition of Time Warner is an example of one plus one equals three.
The Magic One announcement, so soon after getting the green light from regulators, allows it to take the attention off the company’s crushing debt.
A Dividend Cut Is a Must
Moody’s downgraded AT&T’s credit rating to just below junk status June 15 , suggesting the company’s net debt will be $180 billion or 3.5 times EBITDA making it the most indebted non-financial company in the U.S.
AT&T has $11 billion in debt maturing in the next 18 months alone making a cut in its dividend a real possibility.
Currently yielding 6.2%, a 50% cut in its annual dividend would save it approximately $5.1 billion a year (that takes into account the 1.1 billion shares issued in the merger) with another $1.5 billion expected from cost savings.
AT&T is expected to generate $21 billion in free cash flow in 2018. Add to it the $6.6 billion from above and you have almost $28 billion to allocate to acquisitions, dividends, share repurchases, investments in the business, and debt repayment.
Assuming it cuts its dividend by 50%, it would have $21 billion in free cash flow after paying the dividend. If it used the entire amount for debt repayment, it might be able to pay down the debt load in 10-15 years.
Of course, we know that’s not realistic because it’s going to continue to make investments like the one it just made in Magic One to keep ahead of its competition.
There Are Better AR Stocks
InvestorPlace feature writer James Brumley highlighted nine AR stocks to own in early June. At least three of them make a lot more sense as investments than AT&T with Microsoft (NASDAQ:MSFT) leading the way.
“It’s [Hololens] arguably the most market-ready, and marketable, AR/VR headset available today, even if interest has been tepid thus far,” Brumley stated. “This could be a breakout year for the device though. In May, the software giant demonstrated two practical apps that make good use of the hardware: Layou, and Remote Assist. Layout allows for structural designing beyond mere blueprints, while Remote Assist shares what you see with people that aren’t on-site.”
Investing is about probabilities and possibilities.
Why invest in such a heavily indebted company such as AT&T just to get in on the growth in augmented reality?
Microsoft gives you a real alternative without any of the credit risks.
Investing in AT&T stock because of the Magic Leap partnership is downright dumb — although it does make for a nice bit of PR.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
