Telecom & Wireless

Are AT&T and Verizon in Trouble?

Telecom doesn’t look too good these days. From the market leaders to the market laggards, everyone seems to either be spending more and more to make less and less, or in the worst case, just losing money year after year after year.

While leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) look set to keep the top two spots in the near term, the amount of money they are spending in order to maintain those positions may at some point cause a major shake-up. The two have been vacillating in the mid-30% range in terms of market share for years, with Sprint Corp. (NYSE: S) slowly shrinking and T-Mobile US Inc. (NYSE: TMUS) gradually clawing its way up with its acquisition of Metro PCS from 10% to 15% since 2011.

In order to see exactly what is going on, we need to move back a few years and plot some trends. First of all, the amount debt taken on by all four companies over the last five to seven years is simply staggering. With interest rates so low, who can blame them? But they cannot stay low forever and the cost of servicing all that debt is rising, and will keep rising, especially while we are on the verge of the first Federal Reserve interest rate hike in a decade.

AT&T, for example, has increased its debt load 33% since 2012 to $88 billion. And to show for it, the giant has half as much earnings as it had in 2007, with an anemic 11% increase in revenue. Gross margins are 5% lower, administrative expenses 6% higher as a percentage of revenue, and debt to equity has crossed 50%, with 33% of that increase coming in just the past year alone.

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Right now this is all manageable, but if turmoil starts to develop in the debt markets, the telecom leader could find itself needing to scale back in order to maintain some balance on its balance sheet.