AT&T’s high dividend can’t hide its big problem on Wall Street

A big dividend can’t hide AT&T’s big problem — its failure to create economic value (EVA) for its shareholders.

Economists and finance professionals use EVA, or economic profit, to measure how effectively companies invest other people’s money – the money of shareholders and creditors.

EVA is typically measured as the difference between return on invested capital (ROIC) and weighted average cost of capital (WACC).

A positive EVA over time indicates that the management of these companies is creating value for their stakeholders via the capital markets, while a negative EVA indicates that management is destroying value – shareholders should look for better opportunities in other companies.

According to Guru Focus, AT&T has created little value for its equity owners.

In 2021, AT&T’s ROIC was 4.46%, while its WACC was 4%. That puts its EVA at 0.46%, well below the 7.14% dividend that the company pays out. In essence, management is returning capital to shareholders rather than value.

AT&T’s low EVA is poor exploration of low-yield opportunities (eg, failed acquisitions) and high leverage, which increases the cost of capital. For example, AT&T’s long-term debt of $162 billion is 1.5 times its market cap.

Wall Street noticed. Over the past five years, AT&T has lost nearly 37% of its value while the overall market has grown 44% and its close competitor T-Mobile has surged 124%.

And if it doesn’t find new highly profitable business opportunities, EVA could turn negative in an environment of rising costs of capital.

Still, management remains optimistic things will change as it continues to invest in 5G.

“We’re investing at record levels to improve our 5G and fiber connectivity and deliver the best experience available on the market,” AT&T CEO John Stankey said in a third-quarter earnings report. “Our results show that our strategy is resonating with customers as we continue to see robust levels of postpaid phone net adds and are approaching 1 million AT&T fiber net adds for the year.”

But Raj Shah, managing partner of digital consultancy Publicis Sapient, is skeptical about the company’s direction.

“AT&T’s strategy of focusing only on the access layer is feeding the loop telcos that they were desperate to rid themselves of,” Shah told the International Business Times in an email. “Even though telcos are jealous of technology company valuations, they behave like utilities and are valued like utilities. Single-mindedly striving to be great at something gives AT&T a focus it’s lacking, but it’s not a strategy for long-term growth. “ AT&T’s high dividend can’t hide its big problem on Wall Street

Fry Electronics Team

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