Just as AT&T Inc. (NYSE:T) rallied back to multi-year highs on repaying debt, the company made a small cash transaction to reverse the gains of the last year. The telecom has long struggled to produce solid investor returns due to attempting to build an empire with complex transactions versus repaying debt. My investment thesis is now Neutral on the stock after the big gains have been made and the dividend yield is back down to a more normal level.
Finviz Chart
Source: Finviz
Lumen Fiber Deal
AT&T agreed to pay $5.75 billion for the mass markets fiber business of Lumen Technologies (LUMN). Though a relatively small deal, these assets have the same hallmark issues of prior deals: cash transaction, lengthy approval process and complex integration.
In the first 12-24 months, the telecom giant even expects the transaction to have an immaterial impact to adjusted EBITDA, adjusted EPS and free cash flow. With the deal not closing until the 1H'26, AT&T is forecasting spending 2 to 3 years of effort without the transaction providing any impact to the business.
Management will now spend the next year working to close the deal and the following 12 months to integrate the business. The complexity of the deal further questions the benefits with AT&T grabbing only the mass markets fiber customers of Lumen and requiring transactional agreements for 2 years regarding field operations, IT systems, billing and other services, along with the complexity of needing long-term access to Lumen facilities.
Luckily for investors, the deal is less than $6 billion, so the balance sheet isn't completely sunk. AT&T plans to find an equity partner, which could limit the balance sheet impact, but also further adds to the complexity of the transaction.
In an AI world with booming demand for telecom connectivity and data centers, AT&T is busy engaged in a complex transaction for 1 million fiber subscribers and access to only 4 million fiber locations. The company appears to be picking up pennies in a world where dollars are readily available.
The company likely did the deal due to some success in using the fiber network to acquire wireless customers. On the Q1 '25 earnings call, CEO John Stankey made the following statement regarding higher lifetime values:
For example, a significant portion of wireless gross adds that took our lead offers during the first quarter were with converged accounts. This is a key reason why we had more converged household gross adds within our fiber footprint during the first quarter compared to last year. As a result, our converged penetration continues to climb, with more than four in 10 AT&T fiber households also now subscribing to our mobility services. This is a key trend because accounts with both fiber and wireless services have lifetime values that are more than 15% greater than customers with standalone services.
Berstein analysts went further to suggest the fiber and 5G bundle was adding up to 100,000 wireless customer adds each quarter. AT&T was already projected to add 20+ million additional fiber households by 2029, so the question is again why management keeps jumping into these complex deals with extended approval times that distract management.
Immaterial Pain
AT&T has a revenue base of nearly $125 billion while this deal will contribute nearly $6 billion to a balance sheet with $119 billion in debt. A business focused on high-speed Internet customers still appears focusing on d-mb networks versus business that adds a software layer or advanced AI services to the existing telecom and wireless networks.
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Data by YCharts
From the above chart, the stock clearly slumped back 10 years ago when AT&T went on a path to build up debt through 2019. The stock has tried to rally on multiple occasions as the telecom giant went to pay down debt, but the end result is that the management team agrees to complex deals versus building new products.
AT&T continues to push the plan to buy $10 billion worth of stock by 2026 with an intent to buy $3 billion in 2025. As usual, the company just doesn't appear to understand the market wants the company to repay debt and invest in the future, but management continues to be allergic to real debt repayments.
The telecom giant forecasts 2025 free cash flows of $16+ billion after spending $22 billion on capital investments. The stock buybacks and the Lumen deal will already absorb all of the excess cash flows left after paying the $8.4 billion annual dividend.
At only 4%, the dividend yield is now down to the lowest level in years. Investors can make similar interest income via high-yielding savings accounts and buying U.S. treasuries, likely limiting the attractiveness in buying AT&T here.
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Data by YCharts
While AT&T and the whole wireless space is focused on legacy concepts of building wireless and fiber bundles, a company like CoreWeave (CRWV) just went public offering AI infrastructure services via data centers. The company is already on a sales run rate of $4 billion heading towards $10+ billion next year, while AT&T bought a business with limited upside.
One has to wonder if a telecom giant couldn't have become a leader in data center services like cloud and AI infrastructure services versus focused on bundling services for a simpler telecom invoice. AT&T already trades up at 13x EPS targets after the company cut 2025 estimates to between $1.97 to $2.07 versus $2.09 consensus targets.
Takeaway
The key investor takeaway is that AT&T is back to buying legacy businesses without much growth and complex to get approved and integrated. The company should've been exploring new ways to grow the business in an AI world.
The stock isn't appealing here with the dividend yield at the lowest rate in the last decade and the large telecom having limited growth prospects.