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January 30, 2020

Breakingviews: AT&T answers cash call, with caveats

by Breakingviews.

AT&T Chief Executive Randall Stephenson has both equity and debt investors knocking at his door. While he is making good on his goals to shore up the cash coffers, there are caveats, and big capital demands beckon. He risks favoring shareholders too much.

The $280 billion telecom firm has had a tough run. Its deal with Time Warner left it with an overburdened balance sheet. Then activist Elliott Management showed up. AT&T reported fourth-quarter earnings Wednesday and had a solid showing. With $29 billion in free cash flow notched last year, up 30% from 2018, investors can breathe a temporary sigh of relief.

But cash obligations loom large. It has a burgeoning balance sheet with about $150 billion in net debt and is rated just a few notches above junk. A steady stream of cash is essential to pay an expected dividend with a more than 5% yield. Then the company has 5G and video, two capital-sucking initiatives. Stephenson is targeting to reduce the leverage ratio to at least 2.25 times adjusted EBITDA in 2022 from a current 2.5 times.

For a company as big as AT&T, there’s only so much absolute leverage the market can take. AT&T recently issued preferred shares with a 5% fixed dividend, hitting up a new set of investors. Combing through assets to hawk for cash is one way to rebalance. AT&T has shed operations in Puerto Rico and has as much $10 billion in asset sales earmarked for this year.

But these are also the best of times. Unemployment is near record lows, wages are increasing and gas is cheap. Those are all positive signs for a company who counts on consumers to up their bundled entertainment bill with discretionary income.

Shareholders are getting their lot while the going is good. The company is estimating free cash flow to tally approximately $90 billion during its three-year outlook. About half of that pile will be funneled to pay a dividend. Another $30 billion will be used to buy back shares.

No doubt Elliott’s cranked up the pressure on Stephenson for buybacks. And they are in vogue – companies spent $176 billion in the third quarter, according to S&P Dow Jones Indices. But AT&T earned the designation of the most indebted company in the world outside of financial services after acquiring the HBO parent. Best to save some cash for a rainy day.

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