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AT&T: More Financial Engineering For The Long Haul

Jun. 01, 2020 4:06 AM ETAT&T Inc. (T)34 Comments


  • The management team at AT&T has recently engaged in some additional financial engineering aimed at improving the company's long-term prospects.
  • This involves extending debt maturities, reducing fixed interest rates, and staggering when payments will be due on debts.
  • This move appears wise as the company works to pay down other debt and get itself in a better financial position.
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During these uncertain times, companies that are on shaky ground pose significant risks for investors. But for long-term investors, the high-quality businesses are the exact opposite. Firms like AT&T (NYSE:T) are taking this chance to shore up some areas that are weak and to prepare for the long haul. Case in point, we need only look at the telecommunications and entertainment giant's decision to refinance a significant amount of its debt. At first, it looks like the business will be hit with higher interest expense for some debts as a result, but as interest rates eventually rise, the firm is likely to save millions of dollars every year. In addition, this set of transactions solves the problem of coming maturities that management has elected, for one reason or another, to kick down the road as opposed to pay off as they come due. In all, this is an example of prudent financial engineering that will better position the business for the long haul.

A look at the transactions

AT&T has a significant amount of debt on its books. As of the end of its latest fiscal quarter, the business had $164.27 billion in debt, about $17.07 billion of which was due in the 12 months following the quarterly report's release. Total cash and cash equivalents on hand came out to just $9.96 billion, leaving net debt at $154.31 billion. Earlier this year, the firm's management team forecasted that free cash flow for 2020 should come out to around $28 billion. In its latest press release, the firm seems to have revised this thinking some. It stated that its dividend payout ratio (using free cash flow as the denominator) should be around the low end of the 60% range for the year. If the company's aggregate quarterly payout matches the first quarter's payout, this translates to around $25 billion now. That leaves the firm around $9 billion to $10 billion to put toward

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This article was written by

Daniel Jones profile picture

Daniel is an avid and active professional investor.

He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (34)

Veritas1010 profile picture
The “Pom-Pom squad” is out.

An honest evaluation of T’s performance from T-Mobile debacle to present suggests a different outcome and recommendation especially to the uninitiated.

Beware non-performance coupled with an inordinately high yield.

Do you own any stocks that you don't dislike? You should RDS.B that you didn't like to buy more T....that you don't like?
LazyGringo profile picture
Enjoying my new HBO Max and good to see T moving up from grossly oversold territory. I expect T will gets up to about 38 this year and that brings the dividend down to a more reasonable percentage. Back to relative normalcy basically. 31 still a real bargain. Get it while you can.
Insouciant Investor profile picture
A lot of people hate on AT&T for taking on debt for making acquisitions, but that is what T has always done. IMHO they used this historical period of low debt wisely. Instead of doing stock buy backs, they grew the business.

The current AT&T started off as the smallest "baby bell" after the old AT&T was broken up. The current AT&T is now the largest telecom company in the world by revenue. They have also expanded into new areas, i.e. media, and IMHO they have acquired a moat with the Time Warner acquisition. HBO Max has a monopoly on its content. While other companies can also make great content that doesn't invalidate the fact that if you want to watch a WarnerMedia product its going to be through HBO Max.

HBO Max is what will reduce churn and lower acquisition costs for AT&T best customers, i.e. those buying unlimited wireless, fiber broadband, and at&t tv MVPD. Outside of the US HBO Max will allow T to make money primarily though advertising.

The stickiness that HBO Max will add, will be huge. HBO Max creates emotional bonds with people. It adds a huge switching cost for customers.

I also think AT&T will have some of the highest value advertising that companies can buy. The amount of data that they will be able to generate will make even Google jealous. The holy grail of advertising is to be able to measure if it actually works... Who better to know that you just went out and bought a McDonald's cheeseburger for lunch after seeing an add for it on HBO Max earlier that day. HBO Max viewing habits data + cell phone data + fiber internet data = profit.
Basit Saliu profile picture
Great comment.
Fltennisguy profile picture
I like "T"s approach to wireless and HBO Max, i.e. any streaming you do of HBO Max using T's wireless does not count towards you usage plan. Smart bundling move that ups the value proposition of HBO Max and will reduce the churn on T's wireless. This is a smart move as 5G devices becomes available and gets deployed
Basit Saliu profile picture
Great Article Daniel Jones.
Basit Saliu profile picture
Bring on John Stankey and "One AT&T".
Basit Saliu profile picture
5G Mobility, Fiber, Media incl. HBO Max. Go T!
Positive article with a snarky title, who picks the title as it's very misleading?
Fltennisguy profile picture
Related comment, there are some large labor cuts coming up and will be announced at or prior to the 2Q financial reporting. 8 officers announced retirement Friday to take place this year. There is a big push to cut staff as John stanky takes over 7/1. Organizations will be consolidating. It would be nice to see they focus on retiring more products e.g. MPLS EVPN older and similar to MPLS AVPN which are being replaced in the market with SD-WAN solutions.
Basit Saliu profile picture
AT&T D-T-C (AT&T Mobility, AT&T Internet, HBO Max)

AT&T Media or AT&T/WarnerMedia (incl. Xandr)

AT&T Latin America (Vrio, Mexico)

AT&T Business (enterprise solutions)
Basit Saliu profile picture
John Stankey became a board member today, and he will become CEO a month from today.
Fltennisguy profile picture
not sure what you were saying in the above statement?
BTW following my note, many organizations were informed Monday that a cut is coming with only 2 week window to find a position within AT&T
DannyDale profile picture
Good moves. Like I said in an earlier comment. This is a win win. They improve the long term debt outlook. Stagger payments so that there is no excessive pressure at any given time frame. They make a sweet deal now with Roku and things will be going up fast. I am Long T. Look for the stock to be $45 by Christmas.
Good luck with the $45 by Christmas, maybe by some Christmas but not Christmas 2020.
DannyDale profile picture
We’ll see. That’s why a post numbers and dates not just vague comments...
aochamp, he didn't say which year
With 0 or negative interest rates in the western world, AT & T should really knuckle down and renegotiate all their debt. “We could” save Billions!
I have a huge Ameritrade loan with 0.75 % interest and have purchased T shares. Why is T paying so much more?
Very Long T.
Basit Saliu profile picture
AT&T could also turn some of that debts into new shares- which management is already doing. I cannot wait for "One AT&T" and the synergy between the communications and media divisions, AT&T will be running on all cylinders. $100.00 in 2025.
NBR Market Monitor Monitor profile picture
If you owe somebody 50 bucks you have a problem. When you owe people 350 billion dollars they have a problem.
allday1234 profile picture
It is a problem only if you do not have a repayment plan. Regardless of the amount of money involved as long as all parties are in agreement. The agreement can be verbal, but with large sums the amount is normally backed by some sort of collateral or guarantees.

DannyDale profile picture
Basit Saliu profile picture
$147 billion*
allday1234 profile picture
$T is looking at the long term picture as opposed to the short term. Many of the naysayers will in fact criticize the moves made because that is what they do but for those who understand the financial moves made this can help in the long term. I would rely in the wisdom of those who deal with LARGE debt before I would rely on the wisdom of many of those whose only answer is a dividend cut. I of course will not be around to see the end result, but I understand the reasons for it..

Fangorn profile picture
In these times of excessive debts it is prudent to pay off that which one has as speedily as possible.

Personally I'd prefer debt repayment over share buybacks every day of the week.

Great article looking at the debt side. Cheers
Buy back 7% shares (that were yielding even higher for stretches of time), or retire 2.3%-5.5% (at most) debt.....????

Politics/public perception/ bureaucracy got in the way of a better financial move.
Why isn’t buying back shares at these historically low prices, that are costing you a payout of roughly 6%, not better than paying off long term debt at 3%? Simply take the money saved on dividend payouts, on these retired shares, and apply that to the long term debt. Using the money saved from retired shares seems extremely prudent to me.🤔
kthor profile picture
cut dividend for the next 5 yrs to pay off debts!
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