For years, AT&T (NYSE:T) stock has been a “yield trap.” This is a stock who’s dividend is too good to be true. T stock’s dividend yield of 51 cents per share, currently yielding 5.5%, has been thought unsustainable by many analysts. Since AT&T stock has 7.31 billion shares outstanding, the dividend costs almost $15 billion per year to maintain.
To that $15 billion, add interest on $159 billion of long-term debt as of June 30, plus a capital budget of $23 billion and something’s got to give.
That something, according to recent media reports, could be DirecTv, the satellite service. DirecTv cost AT&T $49 billion in 2015 but has lost 2.5 million subscribers in the last year. Trouble is, neither a spin-off nor a sale to DISH Network (NASDAQ:DISH) would bring in anywhere near $49 billion.
AT&T CEO Randall Stephenson’s planned glorious retirement next year is beginning to look more like former General Electric (NYSE:GE) CEO Jeff Immelt’s more ignominious exit.
The Debt
As I wrote back in July and repeated after Elliott Management proposed big changes this month, AT&T has an enormous technology debt, in addition to its financial debt.
Take a walk outside and you’ll likely see some of it. Those copper wires hanging on those old wooden poles are obsolete. Telephony is dying. International long distance calls are free with Skype, and even teleconferencing is free with Zoom (NASDAQ:ZM).
Even when upgraded with fiber to deliver TV, the value of AT&T’s physical network is deteriorating. That’s in part thanks to AT&T itself, which is in the process of upgrading its mobile service to 5G. But the value of that is open to question, as Alphabet (NASDAQ:GOOGL) makes its Google Fi a better deal.
Do I have to mention the plans of Amazon.Com (NASDAQ:AMZN) CEO Jeff Bezos to create global internet access with low-Earth orbit satellites?
The Mistake of the Century
In a 2016 New York Times profile of Randall Stephenson, he ordered his brother, a career lineman, to learn about the cloud.
But Stephenson didn’t buy or build cloud. He sold the company’s data centers in 2018 and is putting his operations on the IBM (NYSE:IBM) cloud.
Stephenson decided cloud was too expensive and risky early in the decade while Facebook (NASDAQ:FB) was investing in cloud before it had the cash flow to justify it. Today Facebook is worth twice AT&T.
The lack of cloud investment was as big a mistake as GE’s decision to buy Alstom, a French turbine maker, in 2015. That was hailed as the “best deal in a century,” but GE Power has since made GE a shadow of its former self.
Stephenson’s plan was to use the content agreements of DirecTv, later the content of Time Warner, to keep people on his services at high and rising prices. He assumed he could license that content to other providers, also for high and rising prices. Since the Time Warner purchase Stephenson has been pushing other players hard, dropping services like NFL Network and even threatening to shut off Disney’s (NYSE:DIS) ESPN. The company is also being accused of setting up fake DirecTv accounts, a charge reminiscent of the Wells Fargo (NYSE:WFC) scandals.
The Bottom Line
Elliott Management wants to rearrange deck chairs on the Titanic. The appearance of change, the sale of some assets, could boost AT&T’s stock price and let Elliott exit its $3.2 billion investment with a profit.
But the problems would remain. The technology debt would remain. Much of the financial debt would remain.
AT&T is doomed.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available 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.