AT&T: The Cost Of Being A Capital Extractor

| About: AT&T Inc. (T)

AT&T (NYSE:T) is one of the highest-yielding big companies around, but those days may soon have to end.

The company has to spend $2.5 billion in order to feed its quarterly dividend of 45 cents per quarter to its 5.4 billion shares. That is more than two-thirds of the $3.7 billion it brings to the bottom line each quarter. The company does have revenues of $127 billion/year, which against a market cap of $201 billion looks dirt cheap for a technology company.

But AT&T is not a technology company. It just plays one on TV.

An example is Digital Life, the service it announced this week. It's charging $150 to start and $30/month for home security based on a Wi-Fi router - that's actually more than rival ADT is charging in Atlanta. (Prices vary by market, and in Seattle AT&T's price is lower.) You don't get much market share matching prices with a proven incumbent.

Besides, a Wi-Fi router is high-tech? Really? Really. Many AT&T lines can only handle 802.11g speeds of 50 Mbps, even though 100 Mbps 802.11n speeds are advertised. The word for that is #FAIL.

AT&T has been managing this trick by squeezing revenue out of its wireline system and expanding only its digital network, which now holds a virtual duopoly with Verizon Wireless, the joint-venture between Vodafone (NASDAQ:VOD) and Verizon (NYSE:VZ). The company now faces a real battle on that front, starting from whenever the dance among Sprint (NYSE:S), Clearwire (CLWR), Dish Network (NASDAQ:DISH) and Softbank plays out.

If the parties there get together, and get serious about new investment, AT&T looks vulnerable. Japan, Softbank's home market, had the same kind of comfortable duopoly for years, between NTT and KDDI, until Softbank entered by buying Vodafone Japan. Now Softbank is the dominant wireless carrier there.

While AT&T has been extracting capital from its network, and using its lobbyists to gain even more money from government for serving schools and low-income neighborhoods, other companies have been investing in their networks. Google (NASDAQ:GOOG) is killing AT&T in Kansas City, it's moving into Austin, Texas, and it has bought its way into Provo, UT. Comcast (NASDAQ:CMCSA) and the other cable operators are becoming dominant Internet providers because their lines simply offer more speed than AT&T's copper, which hasn't been upgraded in a century. And the promised upgrade, U-Verse, doesn't match up.

AT&T has been keeping the swells coming to the stock by hiking it a penny a share every year or two - it's up 5 cents per share per quarter since 2008, and to someone on fixed income that matters. It's a classic widows-and-orphans stock, and will be until the day it dies.

The problem is, it's already doing that. You can still expect yield from this stock for the next two or three years, but once the dividend rises to meet the profit line, you will be out of luck. How close to that line are you willing to go?

Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.