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AT&T Aims to Repay Debt to Improve Balance Sheet Position

AT&T Inc. T recently issued notices for the early redemption of three series of bonds worth $1.2 billion to improve its liquidity position and reduce the burgeoning debt burden through prepayment of upcoming debt maturities. The strategic move is likely to de-risk its capital structure as the company prepares to navigate through the coronavirus-induced global turmoil.   

With this announcement, AT&T has either refinanced or repaid $19.4 billion worth of debt since the end of the second quarter of 2020 either through make-whole redemptions, tender offers or repayment of scheduled maturities. This, in turn, will reduce its upcoming debt maturities within a year by $8.2 billion as the company aims to capitalize on low borrowing costs to de-lever its balance sheet.

As of Jun 30, 2020, AT&T had $16,941 million of cash and cash equivalents with long-term debt of $153,388 million compared with respective tallies of $9,955 million and $147,202 million at the end of first-quarter 2020. This shows that although the cash position has improved, the debt burden has increased. The company currently has a debt-to-capital ratio of 0.47 compared with 0.52 of the sub-industry. The times interest earned has decreased slightly over the past few quarters to 3 at present relative to 3.7 for the sub-industry.

Notably, AT&T has decided to cancel its stock buyback program due to the severity of the coronavirus outbreak. The evolving nature of the contagious disease and its grave impact on the economy forced the company to reconsider the buyback plan, as it is yet to fathom the impact on its business with lack of visibility. Management has refrained from giving any definite outlook for the third quarter as well as for 2020.

AT&T is evolving its distribution channels for changing customer demands and emphasizing on self-installation and software-based platforms to redefine its business plans for the virus outbreak. While optimizing operations, it is aiming to increase efficiencies to lower costs while supporting employees and customers with various financial packages. It has a dividend payout rate of 58.9%. The rate has remained relatively steady over the past few quarters, indicating that the company is sharing its earnings with stockholders. It remains to be seen how AT&T aims to reduce the huge debt burden in the coming days and whether it faces any liquidity crisis due to disruptions caused by the COVID-19 pandemic.

Moving forward, AT&T is committed to its three-year financial framework, which is expected to drive significant improvement in margins and bottom-line growth with sustained investments and debt reduction. For 2020 to 2022, AT&T continues to expect consolidated revenue growth of 1-2% per year. Adjusted earnings are expected to be $4.50 to $4.80 per share by 2022 with adjusted EBITDA margin of 35%. While adjusted EBITDA margin is expected to be stable in 2020, it is likely to grow in 2021 and 2022, driven by extensive company-wide cost-reduction plans, WarnerMedia synergies, continued Mobility growth and AT&T Mexico EBITDA growth. Free cash flow is anticipated to be $30-$32 billion for 2022, with net-debt-to-adjusted EBITDA of 2.0X to 2.25X as 100% debt related to the acquisition of Time Warner assets is likely to be repaid.

We are impressed with the focused attempts of this Zacks Rank #3 (Hold) company to maintain a competitive edge amid these turbulent times.

Some better-ranked stocks in the broader industry worth considering are Clearfield, Inc. CLFD, Nokia Corporation NOK and Qualcomm Incorporated QCOM, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank(Strong Buy)stocks here.

Clearfield delivered an earnings surprise of 45.6%, on average, in the trailing four quarters.

Nokia has a long-term earnings growth expectation of 15.6%. It delivered an earnings surprise of 37.5%, on average, in the trailing four quarters.    

Qualcomm has a long-term earnings growth expectation of 19.8%. It delivered an earnings surprise of 14.3%, on average, in the trailing four quarters.

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