Hey YouTube. I’m Jimmy. So in my last video I walk through my analysis of AT&T stock and in doing my research I took a
look at AT&T debt and although it’s a lot of debt I didn’t see too much of a
problem with it and much to my surprise I got quite a few comments in that video saying that I should talked more about AT&T’s debt. So that’s what I’m going to do in
this video. If you’re curious about the other
video there’s a link in the description below. Now when I first looked at AT&T’s
debt sure I thought that they had a lot
of it but I didn’t see it as much of a
problem. But after the comments I began to
wonder. Perhaps I’d overlooked something. Perhaps there was something bigger
there that maybe I missed. So after a much closer look here’s what I came up with. First off let’s start with this table. This is the bond ratings for the
three major rating agencies. The top half is investment grade and the bottom half is not
investment grade. This is where AT&T’s debt stands with each of these companies. And as we could see their highest
according to Fitch and then both Moody’s and S&P has them rated at the triple B level. Now these ratings also come with an outlook. Now usually what they’ll have is
they’ll have a positive negative or stable outlook. And with all three of the rating
agencies AT&T currently stands at a stable outlook meaning that these ratings are unlikely to change anytime soon. Now these ratings are important. So right now the average yields for triple-A corporate bonds of
let’s say 20 year bonds is about three point eight percent. Now the average yield for bonds with an A rating well they’re yielding about four point nine
percent drop down to the triple B level. And you’re getting about 5.5
percent. And obviously the more the rating falls well the more expensive debt becomes for that company. Now let’s take a closer look at AT&T debt. So as of the end of the third
quarter and 2018 which is the last quarter
that AT&T reported Well AT&T had long term borrowings of about one hundred sixty nine billion
dollars and another 15 billion that was due in the next twelve months. Now technically that amount due in the next twelve months is short term
debt but for our purposes we’re just
gonna group it altogether and we’re just gonna call it debt. So if we round that we’re gonna say
it’s about one hundred eighty five billion dollars
in debt. Now I’m ignoring other forms of debt
like their pensions or deferred taxes or short term debt like accounts payable. Now AT&T actually does a great job of mapping out their debt for us on the Web site. They even have a spreadsheet with all the individual bonds listed
on it. And if this type of thing gets
excited. Well the 10k in the 10 Q They’re footnotes go further in
detail about these bonds. So there’s tons of information out
there for anybody who’s interested. Now do you see we could see how much
debt AT&T really has. Here’s their market cap. AT&T market cap. And when we add debt what we could see that debt is almost as big as their market cap. Now to put this scale in perspective these green bars these are Coca Cola’s market cap relative to their debt. And if we were to swap that out with a competitor like Verizon we could see that Verizon has more debt
than Coca-Cola. But still AT&T is relatively much more debt compared to those
companies. So how bad is this debt and does it threaten their dividend. So the short answer is of course a company having a lot of debt is a
bad thing relative to a company that has
no debt. So why didn’t I think that AT&T debt was a threat to their impressive dividend. Well here are a few stats that I
thought was interesting. First the average interest rate weighted average interest rate for the debt outstanding is about
four and a half percent with an average maturity of about 12 years. Now I think that is important
because as a as we all know interest rates
have been rising. So the question is is that rise in interest rates going to eventually. Hurt. AT&T dividend or their ability to pay that
dividend. Now personally I don’t think that
their debt is a threat to the dividend right
now. And here’s why this is a chart of AT&T debt by maturity. And as we could see they have a
decent amount of debt that’s coming due in the
next few years. But broadly speaking a lot of their debt is fairly well spread out amongst the whole chart. This chart goes all the way to two
thousand forty nine. But AT&T has debt going all the way up to two thousand ninety six. So that final bar is what expires in two thousand forty nine. And all the debt after that it’s all
combined into one bar. So now let’s look at that impact of rising interest rates on their debt. Now we know that the weighted
average time until the bonds must be repaid is about 12 years which means that if they would issue a bond today and it would be at their average
well 12 years from now they would have to
repay the original principal. So the question is not our bond
rates rising. The question is how different will the cost of debt be with the change of interest rates
for AT&T. So this chart here this comes from the Federal Reserve and shows the average yield of high quality corporate bond rates going back to 1984. And as we can see yes rates have been rising recently. Now these are 10 year bonds at this
rate is looking at. So if this is an AT&T bond that is
being replaced now. Well that bond would be based on that point in time. Now I know this is a very crude way
of demonstrating it. And obviously it doesn’t always
work out like this because we’re just using an average. But I want to show this because I
feel that this chart illustrates how relatively small of an increase. The rise in interest rates has been compared to its own historical
averages. Now rates may continue to rise for the next few years albeit probably at a slower pace. But either way I’m not sure that this is going to become too much for
AT&T to deal with as far as the interest
rate payments go. And I’m not sure that the way
the rates are rising right now that AT&T dividend is
going to be threatened anytime soon to examine. Let’s look a bit closer. Jumping back to the maturity date
chart. Well when we look a bit closer let’s
say 2021 just because they have the largest
amount due in any single year. Well the weighted average rate of that debt was a bit over 4
percent. Now if that debt was all renewed at let’s say today’s rate which is likely to be close to 5
percent which is about 1 percent higher than
the current rate. Well it’s important that we consider
that that 1 percent increase is only on about 7 percent of all their debt. So when it comes to what 18 teams
ability to continue to pay their interest
expense what they’re going to have a very
minimal impact by if they had to renew all of that debt at that point. So now when we look at AT&T
earnings before interest and taxes and compare that to their interest expenses well we could see that
right now. AT&T has more than three times operating profits compared to the interest expense which tells me that they have enough money to or at least now enough operating
profits to continue to cover their interest
expenses. And as we said in the previous video we know that they have enough
coverage to handle their dividend payments which
is after their interest expenses and taxes are paid. Now in reviewing the last earnings
report specifically their earnings call that they had
well they made a few points first 90 percent of their debt is at a fixed
rate and this is important because that
means that they’re not going to get a sudden jump in
interest expenses thanks to the resetting of debt plus AT&T management has stated their desire to have debt levels relative to income at historic lows by 2022 and they claim that they will be
able to fund that mostly by free cash flow and maybe sell off a few of their non core assets or businesses either way because AT&T debt is so spread out their credit rating remains stable
at least for now it seems that their dividend payments and their interest payments
are manageable relative to their profits. I personally feel fairly confident in my analysis of AT&T stock and AT&T debt. But do you agree. I do recognize that every investor is different and every investor
needs to do their own research and we’ll have their
own perspective. For many this amount of debt is simply going to be too much to let them feel comfortable. And I completely understand that. Let me know if you think AT&T has too much debt in the comments below. If you haven’t done so already hit
the subscribe button. And thanks so much for sticking with me all the way to
the end of the video and I’ll see in the next
video Thanks