I’ve said on several occasions over the past year that the level of debt it’s piling on makes it an easy casualty should interest rates continue to climb higher:
“AT&T is going to have $175 billion in debt. It currently pays an average of 3.75% on its debt. Let’s assume the interest rate it pays stays around that level — it will cost the company $6.6 billion in the first year. A 1% increase in the rate paid equals a $1.7 billion increase in the payments to $8.3 billion annually. A 2% increase to 5.75% would mean a 53% bump to $10.1 billion.”
Needless to say, I don’t see how the addition of Time Warner is an example of one plus one equals three.
The Magic One announcement, so soon after getting the green light from regulators, allows it to take the attention off the company’s crushing debt.
A Dividend Cut Is a Must
Moody’s downgraded AT&T’s credit rating to just below junk status June 15 , suggesting the company’s net debt will be $180 billion or 3.5 times EBITDA making it the most indebted non-financial company in the U.S.
AT&T has $11 billion in debt maturing in the next 18 months alone making a cut in its dividend a real possibility.
Currently yielding 6.2%, a 50% cut in its annual dividend would save it approximately $5.1 billion a year (that takes into account the 1.1 billion shares issued in the merger) with another $1.5 billion expected from cost savings.
AT&T is expected to generate $21 billion in free cash flow in 2018. Add to it the $6.6 billion from above and you have almost $28 billion to allocate to acquisitions, dividends, share repurchases, investments in the business, and debt repayment.
Assuming it cuts its dividend by 50%, it would have $21 billion in free cash flow after paying the dividend. If it used the entire amount for debt repayment, it might be able to pay down the debt load in 10-15 years.
Of course, we know that’s not realistic because it’s going to continue to make investments like the one it just made in Magic One to keep ahead of its competition.