Justin Sullivan
A lot has been said about AT&T (NYSE:T) and its acquisition and subsequent spin off of Warner Media and what it means for the telecommunication giant. The company has been struggling to find its place in a saturated market where they, alongside various companies like Verizon (VZ), T-Mobile (TMUS) and others, compete for a finite amount of consumers. To top that off, lower cost wireless companies are coming onto the scene and siphoning away customers, which is further hurting companies’ abilities to get new subscribers.
But one of the more optimistic points I’ve come across in my increasingly bullish stance on AT&T is that, in a rising interest rate environment, they’ve been prioritizing reducing their overall debt load while other companies like Verizon and T-Mobile currently carry some of their highest-ever debt loads.
As I believe that the company has multiple avenues to lower costs in the long run, I believe they are best positioned for a potential long-term investment.
Similar Growth Projections – More Or Less
The top 3 telecommunication companies are all expected to grow at roughly the same rate, with T-Mobile slightly outpacing AT&T and Verizon when it comes to the companies’ revenues. Before showcasing those numbers, take note that the sharp drop-off in revenues is from the spin-off of Warner Media.
Here are those numbers and year-over-year growth figures:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| AT&T | $125.5B | $122.5B | $124.2B | $124.5B | $127.2B |
| -25.7% | -2.39% | +1.43% | 0.19% | +2.19% | |
| Verizon | $136.4B | $138.3B | $140.3B | $142.9B | $146.9B |
| +2.11% | +1.37% | +1.45% | +1.83% | +2.85% | |
| T-Mobile | $80.9B | $83.5B | $86.6B | $91.2B | $95.6B |
| +1.03% | +3.21% | +3.72% | +5.23% | +4.83% |
(Source: Seeking Alpha Earnings Projection Aggregator – T, VZ, TMUS)
When it comes to company earnings, T-Mobile is seemingly in a much better growth position but it has a lot to do with their wireless business charge of $1 billion after selling it, as well as it realizing the full benefits of the merger with Sprint, which was completed in the first quarter of 2020.
The company expects the full benefits to materialize over the course of 6 years, or through 2026, contributing to the fact that their current EPS projections far outpace their revenue growth rate projections.
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| AT&T | $2.54 | $2.52 | $2.58 | $2.61 | $2.77 |
| -25.4% | -0.66% | +2.46% | +1.14% | +5.89% | |
| Verizon | $5.16 | $5.25 | $5.30 | $5.42 | $5.75 |
| -4.26% | +1.71% | +1.06% | +2.25% | +5.92% | |
| T-Mobile | $2.17 | $6.36 | $9.63 | $12.71 | $15.74 |
| -49.3% | +193% | +51.6% | +32.0% | +23.8% |
(Source: Seeking Alpha Earnings Projection Aggregator – T, VZ, TMUS)
When it comes to multiples (available at linked-above earnings projections), all companies are more or less fairly valued relative to each other. This means that we must look forward to see what can facilitate an overperformance and which companies will be set back by various factors.
Long Term #1: Debt & Interest Expense
Even though the top 3 telecom companies have nearly similar growth trajectories after their various charges and spin offs are fully accounted for, I believe it is AT&T who is best positioning themselves for long term gains.
With the emergence of 5G and various interconnected technologies, laying down and investing in infrastructure is an important thing, and having the right amount of cash is necessary. Therefore, the amount of debt will be a good predictor of profit growth later on as interest rates and interest expense rise.
Right now, T-Mobile and Verizon both have some of the highest debt levels they’ve had in the last decade or two while AT&T has been paying it off. There’s also the caveat that Warner Media debt has been spun off, but even when accounting for that, they are paying down some of their debt to conserve cash.
Here are the comparative figures for the top 3 telecom companies:
| 2018 | 2019 | 2020 | 2021 | Current | |
| AT&T | $167B | $149B | $152B | $152B | $130B |
| Verizon | $106B | $101B | $123B | $143B | $138B |
| T-Mobile | $25.5B | $24.9B | $66.5B | $68.6B | $68.0B |
(Source: Company Balance Sheet)
Having a higher debt load isn’t necessarily all that bad, especially if you’re able to keep it at reasonable levels, but in an environment where interest rates are rising, higher debt load means that the company will be paying more in interest expense, which means they’ll have less cash to spend on future infrastructure developments and upgrades.
Here’s a look at how the top 3 companies compare:
| 2018 | 2019 | 2020 | 2021 | Current | |
| AT&T | $7.96B | $8.42B | $7.93B | $6.88B | $6.55B |
| Verizon | $4.83B | $4.73B | $4.25B | $3.49B | $3.11B |
| T-Mobile | $1.36B | $1.14B | $2.73B | $3.36B | $3.39B |
(Source: Company Income Statements)
There are 2 takes I have from this:
the first is that AT&T, in my opinion, has the opportunity (especially if we do indeed head into a recession when the federal reserve would likely lower interest rates) to refinance a good chunk of their long-term debt to debt with lower interest rates. Not have they paid off some older debt, which had very low interest rates, and are left with more recent debt which carries a higher one, but they also have a fair bit of debt with a floating interest rate – which surged over the past year and limited savings from paying off their debt.
The second take is that as the company pays off its debts which are due in the next 12 to 18 months or so – they’ll be offloading a lot of that higher rate debt as well as floating rate debt, which is about $10 billion. This will allow them to save additional cash and invest it elsewhere as they look to expand various business segments.
Long Term #2: Operating Expenses
Another positive for AT&T is that they’ve been working diligently, even before the spinoff of Warner Media, to lower their overall costs so they can conserve more cash and income for expansion opportunities and shareholder value.
Here’s a look at how operating expenses have evolved over the past 5 years:
| 2018 | 2019 | 2020 | 2021 | TTM | |
| AT&T | $59.7B | $69.3B | $66.2B | $52.2B | $51.8B |
| Verizon | $43.6B | $47.2B | $46.5B | $48.2B | $50.4B |
| T-Mobile | $19.5B | $20.1B | $31.4B | $35.6B | $35.9B |
Now obviously we know that AT&T’s number drop from 2020 to 2021 was due to the offloading of Warner Media and then the increase from 2019 to 2020 with T-Mobile was the merger with Sprint. But even so, the figures have a clear trend and with the other 2 companies that trend is up and with AT&T it is down.
All companies try to cut expenses by eliminating jobs and operating expenses and all have been laying off their workers for the past few decades but it seems that only AT&T has managed to show actual results in these figures.
Conclusion – The Best Is Yet To Come
As telecom companies are feeling the pain in their wireless businesses, they are building up their fiber networks and other business segments to try and grow their subscriber counts. AT&T has, thus far, been able to outshine its peers and competitors by growing subscribers in the past 2 years by more than they have in the previous decade.
They’ve also managed to cut expenses in a serious way and are tackling their long-term debt in order to deleverage their balance sheet and save more cash by lowering interest expense. Although some of its peers are trying to do the same, AT&T has actually been succeeding and their debt load is being lowered.
As a result, even though all major telecommunication companies are operating in a rather saturated market where they’re essentially just fighting for each other’s customers – AT&T is placing itself in a prime long-term position.
By conserving cash, they can increase their profit margins and then use it for 2 things: undercutting competitors on price for their services and shareholder value programs like increased dividend payouts and share repurchases.
As a result, I am increasingly bullish on AT&T and believe they will outperform their peers over the next 5 to 10 years.
Be the first to comment