AT&T (NYSE:T) seems to be one of the safest investments in the world. It has over 273,000 employees ranging from operators and cell tower repairmen to CNN anchors and Lin Manuel-Miranda, now directing In The Heights for the Warner studio. Oddly, though AT&T stock still feels a little risky.
The market sees risk in AT&T’s debt. That stood at $167 billion at the end of March, much of it taken on to acquire Time Warner. That’s why shares opened at about $33 per share on June 28, very near the level they were at a year ago. The yield on the company’s 51 cents-per-share dividend is a fat 6.27%. Our Luke Lango and Nicholas Chahine both like that dividend. I did once, too.
But there’s another kind of debt, technology debt, that I worry about.
AT&T Stock and Technology
AT&T is known as the phone company. Do you have a phone?
I don’t. I have a smartphone. A smartphone doesn’t need wires. It doesn’t need AT&T’s network.
The AT&T wire I do have connects to my TV. It also delivers internet which, where I live, can send data as fast as 1 Gigabit/second. AT&T had a capital budget of $25 billion last year, much of it spent adding more fiber to its local networks.
But that local fiber is being made obsolete by AT&T. Much of the company’s $23 billion capital budget this year is going into its wireless unit, born through the 1994 acquisition of McCaw Cellular.
What 5G wireless service promises to AT&T subscribers like me is speed. The theoretical maximum is 10 Gigabits/second. That’s faster than my AT&T fiber.
I currently pay AT&T $450 per month for all its services, including cable, internet and mobile. We know that cable money is vulnerable to customers switching to streaming. But what about the internet piece? Might I, in a few years, just cut out my Internet wire and go wireless, either with AT&T or a competitor? What would happen to AT&T’s cash flow then?
The Competition and AT&T Stock
There are more competitors just over the horizon, networks of small space satellites proposed by SpaceX, OneWeb, Amazon.Com (NASDAQ:AMZN) and Facebook (NASDAQ:FB).
It all reads like science fiction. Hundreds or thousands of satellites in low-Earth orbit, providing fast, cheap broadband to everyone in the world. While astronomers are worried about losing their view of the stars the first such satellites are already being launched.
AT&T knows this. It’s why they bought Time Warner. Rather than just compete to deliver bits, whose cost keeps declining, AT&T figures it can get more money with the product of those bits, entertainment. But can it meet its capex budget and pay down its debts and pay you your dividend, which costs it over $13 billion per year?
The Bottom Line on AT&T Stock
Most analysts know all about AT&T’s debt level, its capex budget, and its dividend costs. They see $4.3 billion in net income last quarter, $45 billion in revenue for the June quarter, and assume it will all work out.
But technology changes fast. Telephony is dead money. Cable became obsolete in an instant. Radios are replacing wires everywhere, and they’re getting better all the time.
Changing technology creates technology debt for those who adopted, or are married to, older paradigms. AT&T has an enormous, and growing technology debt. How high will it go, and how quickly?
That’s what is holding down the price of AT&T stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, 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 AMZN.
