The Fed Has Invested In AT&T Debt - What Are You Waiting For?

Summary

• AT&T has an impressive debt profile, with the Fed buying back debt, supporting low interest rates for the company.
• The company's overall cash flow has remained strong. With the cancellation of share repurchases, its dividends are very sustainable.
• Going forward, the company will be able to continue its growth and generate strong shareholder returns.
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AT&T (NYSE:T) is one of the largest telecom companies in the world. The company has struggled since the start of COVID-19 to make any significant headway in its share price, as investors have moved towards "growth" stocks and away from "debt" stocks. However, with the Fed investing in AT&T bonds, now is the time to take a look at the near-7%-yielding common.

CNBC

Debt Profile

Since AT&T's acquisition of TimeWarner on the back of what most consider a poor acquisition of DirecTV, investors have consistently focused on the company's debt load.

Debt Towers - Investor Presentation

Specifically, AT&T's debt load reached an astounding $180 billion after the acquisitions, making it the single most indebted company in the world. Most investors balked at the sheer size of that number, refusing to invest in the company. However, in a low interest environment, leveraging up your balance sheet with debt is actually incredibly intelligent.

The reason is a simple. Let's say you're a $200 billion company and you leverage up with $200 billion in debt. You'd have to be in a business that's so intrinsic to customers' lives that you could withstand a recession. Fortunately, AT&T provides the content everyone consumes, the internet to their homes and businesses, and the cellular connections for their phones.

With that $200 billion in debt you pay, as interest rates hit record lows, roughly $7 billion in annual interest. The businesses you acquire generate $15-20 billion in annual cash flow, giving you $8-13 billion in annual "no strings attached" cash flow. The benefits of such investments, especially if they help diversify your core businesses, are clear.

Now these numbers are made up, but it indicates that investors shouldn't just throw out the company. And the potential benefits to investors are clear. In the two years since its debt peaked, AT&T cut

Analyst’s Disclosure:I am/we are long T. 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.