Categories: Capital Markets, Carriers

AT&T eyes capital markets and fiscal cliff; CEO meets with President

AT&T eyes capital markets and fiscal cliff; CEO meets with President

AT&T made telecom infrastructure providers all over the country happy last month with its announcement of Project Velocity IP, a $14 billion investment in the carrier’s wireless and wireline infrastructure that will take place over the next three years. But so far investors have received the news with less enthusiasm.

Despite AT&T’s 29th consecutive annual dividend increase, announced at the same time as Project Velocity IP, the company’s stock price has languished. It closed at $34.80 the day before the November 7 announcement, and has yet to regain that level.

On November 14, Fitch Ratings Services downgraded AT&T’s credit outlook from stable to negative, citing the “combined effects of a moderate increase in wireless and wireline spending and the continuation of its share repurchase program.” AT&T has carried roughly $60 billion in long-term debt on its balance sheet throughout 2012, and its debt is less than 40% of total capital. Both of those numbers are expected to increase in 2013.

Project Velocity IP may reduce cash flow in 2013, but longer term the investment is expected to generate returns in excess of AT&T’s borrowing costs. “Based on our analysis, we believe AT&T can potentially create solid cash internal rates of return well above its weighted average cost of capital on Project Velocity IP,” said analyst Kevin Smithen of Macquarie Securities. “However, in the near-term, we believe the market will be focused on the nearly $5 billion drop in free cash flow in 2013.”

The fiscal cliff
Of course forecasts of the returns AT&T’s investments can generate are predicated on the assumption that American enterprises and families will continue to make their own investments in AT&T’s improved service offerings. That’s an assumption that could fall apart if the nation tumbles off the fiscal cliff next month.

AT&T CEO Randall Stephenson was one of half a dozen chief executives who met with President Obama late last week to discuss the tax and budget negotiations underway in Congress. Stephenson emerged from the meeting convinced that the fiscal cliff must be avoided at all costs, and released this statement:

“Failure to address this will result in severe market disruptions, a return to negative economic growth, and businesses pulling in investment. This can and must be avoided. It is no exaggeration to say that the future economic well-being of all Americans is riding on the outcome.”

Stephenson said members of Congress must put aside their differences now for the good of the country, and accept tax rate increases as well as entitlement reform.

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