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