AT&T: Tough to Go With the Flow
AT&T looks a bit pressed for cash. The company surprised analysts late Tuesday when it said it would generate free cash flow of around $11 billion in 2014, far short of the $15.5 billion Wall Street projected. With roughly $9.7 billion of dividends due to be paid out of that sum, AT&T is left with little room for error even as competition in U.S. wireless is intensifying. The primary reason for the shortfall: an increase of up to $3 billion in anticipated cash taxes this year. In addition, AT&T plans capital expenditure of about $21 billion as it institutes a new plan to streamline operations and moves into the peak year of its network investment program. Moreover, the $11 billion free-cash-flow figure excludes extra spending arising from the acquisition of Leap Wireless International. AT&T may start to feel the pinch with competition heating up. T-Mobile US has roiled the industry with a series of promotions aimed at taking market share. AT&T's average revenue per user showed little sign of that competitive pressure in the fourth quarter. But things could worsen in 2014 given the price cut to plans the company implemented late last year, New Street Research says. And T-Mobile's latest offer to cover the fees new subscribers pay for early termination of contracts with other carriers may have a sizeable effect. That doesn't even take into account what Sprint might do. AT&T's net debt stood at 1.73 times earnings before interest, tax, depreciation and amortization, adjusted for pension obligations, at the end of 2013. That is already close to the company's target level of 1.8 times, limiting the desirability of taking on more debt. How else to bridge any free-cash-flow shortfall? Share buybacks, which totaled a whopping $13 billion last year, are a likely casualty, especially as AT&T takes great pride in its dividend, and therefore is highly unlikely to cut that. Alternatively, it could slow capital spending or sell assets. Last month, it said it would sell its Connecticut wireline operations to Frontier Communications for $2 billion. But tighter cash-flow math presents difficulties for any plan to buy Vodafone. AT&T has said it doesn't want to risk its credit rating by borrowing a lot. Meanwhile, funding an acquisition with stock risks diluting shareholders and could present complications in a cross-border deal. Tighter cash flow could make 2014 a cold, hard year for AT&T.