AT&T’s 6% Yield Isn’t Safe

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June 25, 2009 11:44 AM EDT by Cody Willard

AT&T's 6% Yield Isn't Safe

Before I ran a hedge fund, but after a few years after I'd been a stock broker, I worked for a tech incubator and eventually ran the wholesale division of a billion dollar telecom company that's actually still around. (Any guesses what CLEC I once worked at?) One of that telecom company's biggest successes was when we signed AT&T, the long distance carrier, as a customer when they were trying to figure out how to come into the NYC area and compete with Verizon in offering local and DSL broadband services.

That was less than a decade ago that AT&T was a long distance carrier. Remember what a long distance carrier was? It's not exactly a booming business these days.

No, eventually, the local telephone company that had once been a part of AT&T, SBC bought out AT&T and then changed its name back to AT&T. And they got serious about wireless. And now wireless is pretty much the only thing that matters to AT&T's shareholders.

So let's talk AT&T and its wireless prospects. AT&T is, of course, the exclusive provider of Apple's wondrous iPhone in the US. That's mostly because AT&T's only one of two major wireless providers in the US that are built on the GSM type of wireless infrastructure technology over which all those bits and bytes flow over to make voices, games, and music files work on your handset.

AT&T's network sucks though. It's true -- I have used every wireless provider and most every smartphone out there on a regular basis at one point or another, and while Verizon's clearly got the worst selection of handsets in the business, they've got the best network. Meanwhile, AT&T's clearly got the best selection of handsets (mostly speaking to the iPhone here, but other exclusive AT&T phones aren't bad either), but the worst network.

AT&T's also futzed around for years and neglected to build their fiber optic networks as Verizon has done with Fios, which is a huge success and, because fiber optic networks are nearly infinitely upgrade-able and have a near infinite amount of bandwith that can pass over them, Verizon's wireline business is actually meaningful while AT&T's network, again, just doesn't matter to the business; wireline services are just a declining cash cow at AT&T.

But wireless is providing growth at AT&T. And the iPhone rocks. And even though AT&T's service can't even deliver MMS and other cool features that the iPhone supports on better GSM-based networks around the world, the iPhone will keep AT&T is a position to keep growing for a long time.

It's widely known that iPhone users suck more bandwidth than any other handset owner. The margin on such services will increase as that usage and the number of users using that bandwidth increase. And that's good for AT&T.

The stock itself is closer to the annual lows that its highs, in large part because the company once again blew the launch of the latest iPhone with all kinds of technical snafus. That's got the yield on this puppy up over 6% again. And that should get me interested.

What's the problem then, why haven't I added AT&T to the RevolutioNewsletter portfolio, then? Remember that I keep telling you guys that "debt is death". It is, and here's yet another company that borrowed billions of dollars in the boom years to buy back their own stock and inflate their earnings per share temporarily, rather than saving up for a rainy day and/or paying down all their debt. The company's got about $5 billion in cash. But it's got more than $60 billion in debt.

You might have heard about the credit crisis we're in. You might have heard that most banks won't lend money and most companies can only borrow money when the government guarantees those loans will be paid back with taxpayer largesse if the company can't pay it back (GE, for example, has begged for and received $120 billion worth of guarantees on the debt they issue to keep their lights on -- "GE, We beg taxpayers to bring us light").

Companies don't beg for welfare guarantees on their debt if they don't have to. And AT&T and others like it that have tens of billions of dollars in debt are going to have some serious financing problems as that debt comes due.

Don't let th 6% yield on AT&T and the incredible growth prospects of its wireless/iPhone business fool you. Debt is death and $60 billion of debt on one little balance sheet is plenty of red flags enough for me to stay the hell away from AT&T.

Contrast AT&T's yield with Microsoft's 3% yield, protected by tens of billions of dollars in net cash and no debt on their balance sheet -- now that's something you can count on. And that's why I keep MSFT in the newsletter portfolio even though it's a boring old tech stock without much exciting earnings growth potential and a management that only knows how to fight last year's battles.

AT&T, reach out and sell some stock.

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6 Comments

Night Ranger

Their 6%-plus yield is more a function of their pathetically weak stock price. Whether the dividend is safe is certain open to question given, as you note, their 74B in total debt and about $10B annually for the dividend. As the wireless business tanks, all bets off.

June 25, 2009 at 1:53 pm

Atlanta moving

Cody- When were you in LD whole sale? I was in the business for a few years and managed carrier relations for a U.K. based company doing international and international mobile minutes before the dot com bubble went boooooom (the positive out of that mess is our company got and then spent and lost tuns of money from George Sorros). Man when the telecom buiness was humming it was a sight to behold. Relating to your post I once went to a whole sale tade show in CA and At&T hosted an after party for the whole sale carrier crowd at Disney Land (I beleive they hads a large tie into Disney with EPCOT and other sponsoships). No big deal except for the entire Disney Land was closed except for the couple hundread telecom folks...it was crazy walking up to a ride and seeing no one in line in front or behind you. Those days are gone but fun while they lasted. I agree debt is a tight rope around at&t's neck.

June 25, 2009 at 2:49 pm

hogrunr

Are you serious? "Verizon’s wireline business is actually meaningful while AT&T’s network, again, just doesn’t matter to the business" You are throwing wireline and Fiber products into the same barrel? They aren't even close!!! Yes of course ATT's wireline PHONE service is declining and losing money. But no, ATT Uverse, their Fiber service is not. In fact, it is out-signing new customers on a regular basis over Verizon FiOS and will continue to do so because of how much better the price point is for the same services. If you compare Apples to Apples, as in ATT Wireline PHONE and Verizon wireline PHONE, maybe Verizon is doing better than ATT, good for them. It's still a dying service, regardless of who is losing money on it slower. The insane amount that Verizon has invested on running Fiber to every single residence over ATT's more intelligent design of Fiber to a neighborhood and then using the existing wiring, is going to bite them in the aft end. But considering the fact that I'm sure you live in a Verizon dominated marketplace, this ignorance doesn't really surprise me. Spouting off your opinion as fact doesn't make what you say true. Next time do a little research the services and how they are grouped before you lump everything into one category.

June 25, 2009 at 3:40 pm

Steve Shirk

Night Ranger is correct. The 6% dividend is just a product of the lost value in stock price from Nov 2007 to March 2008. I would consider the number of quarters that SBC and BellSouth were able to pay a dividend prior to the creation of the new AT&T before counting them out in the current economy. Both companies have paid a dividend just about every quarter since divestiture in 1984. One or the other may have missed a quarter or two, but I can't remember one, and I have held stock in all the RBOCs for more than 20 years, and have received a dividend check regularly. Verizon may be the better of the two, but there is very little difference, other than architecture. AT&T will not likely have any trouble with their debt, and certainly will not be taking government money as dumbo willard suggests. I would still stick with dividend producing investments, rather than counting on capital earnings during these hard times. In the event AT&T's dividend goes down significantly, I am betting it will be because the stock price rebounds, not that the board decides to cut the dividend. Doesn't AT&T still have an exclusive U.S. contract with Apple for the Iphone, now selling yet another upgrade as fast as they can turn them out?

June 25, 2009 at 7:38 pm

Corey in GA

My service on my new AT&T Samsung a777 is so bad that I will be having it checked at the AT&T store. I'm pretty sure it's just that the AT&T network is so much worse that on my commute (along/near 400, a major highway in Atlanta/Alpharetta), I got dropped twice and had to end a call due to excessive static, in 10 minutes, vs never any problems with my Verizon KRZR. We have UVerse scheduled for install, and only my wife's insistence on keeping the appointment and the free install has prevented us just disconnecting Comcast and going with airwaves. Hogrunr, using the existing lines may make more sense on first cost, but I will be carefully evaluating the image quality, and in fact reviews of the quality nearly made us reject UVerse out of hand. They will not give any info as to how far anyone's home is to the neighborhood box, so you can't assess your chances of a good signal without having them spend the time and money to install it. 699 days until I can switch back to Verizon.

June 26, 2009 at 8:26 am

MG

About your June 22 blog: Do you REALLY not understand the difference between an $8,000 credit for FIRST-TIME home buyers as opposed to "new" home buyers? How is THAT welfare for the rich?

June 29, 2009 at 10:21 pm

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Cody Willard is an anchor on the FOX Business Network. Willard is also the principal of an investment management company. He was a long-time featured columnist for the Financial Times and TheStreet.com as well as a regular featured economist and stock picker on CNBC's ''Kudlow & Company."
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AT&T's 6% Yield Isn't Safe