Published November 07, 2012
AT&T Inc will boost capital spending by about 16 percent to $22 billion a year for the next three years to fund upgrades to its wireless and wireline networks, the company said on Wednesday.
AT&T shares fell more than 2 percent after the news.
AT&T needs to invest to compete better with Verizon Communications Inc , which is ahead in delivering high-speed mobile services, and must improve its rural phone lines, comprised of outdated copper technology.
The company also said that it hopes the investments will boost revenue growth by allowing it to chase new opportunities such as adding wireless connections to cars and home security.
AT&T said upgrading its wireline network was more attractive financially than other options such as carving off the business or divesting parts of the network. Previously, it said it was considering selling some rural phone lines.
"This gives us the opportunity to improve our top-line growth and change our cost structure," Chief Executive Randall Stephenson told analysts at an AT&T event in New York.
However investors worried about the hike in annual spending compared with AT&T's capital budget for $19 billion to $20 billion for 2012 even though the company vowed to come in at the low end of the target range this year.
"It's a big number and it's not just for one year," Hudson Square Research analyst Todd Rethemeier said.
While Verizon Communications sold off many of its hard-to-reach rural phone lines in recent years AT&T was left with the choice of either selling its rural lines or investing in them. It was forced to choose the upgrade option because it could not find a buyer, Rethemeier said.
"They're doing it because they really have to do it," said New Street Research analyst Jonathan Chaplin but he added that "the pay-off is unclear."
AT&T said the investment would lead to revenue growth 100 basis points above the U.S. gross domestic product, supporting earnings per share growth in the mid-single-digit percentage range for the next three years.
But Chaplin was unimpressed with the growth targets which he said were just in line with his previous expectations.
"It looks like a giant boost of spending for the results we thought (they'd produce) all along," he said.
AT&T shares were down 81 cents or 2.3 percent at $33.99 on the New York Stock Exchange after the news. The S&P 500 stock index was down 2 percent.
Included in the three-year spending plan is a budget of $8 billion for expanding the wireless network and $6 billion for upgrading the wireline network, the company said.
This will cause capital expenses to increase to the high end of the company's target for spending in the mid-teen percentage range of revenue for the next two years, with spending returning to normal levels in 2015, according to AT&T.
The company also plans to tap debt markets to take advantage of historically low interest rates. As a result it expects its ratio of net debt to earnings before interest, tax, depreciation and amortization to increase to the 1.8 range over the next two years from 1.42 at the end of the third quarter.
Chaplin said he expects the company will partially offset the blow from the prospect of steeper spending, by using the additional financing to buy back more shares.
The company also said it would raise its quarterly dividend to 45 cents per share from 44 cents.
Under its plan, AT&T said it would upgrade its wireline network with fiber to reach another 1 million business customers and would provide high-speed Internet service to 75 percent of its wireline customer locations.
It will expand its U-verse services, which include high-speed Internet and television services, by a third to cover 43 percent of its network by the end of 2015.
The wireline upgrade plans should benefit AT&T's main equipment vendor Alcatel-Lucent , and to a lesser extent Juniper Networks Inc , Cisco Systems Inc and Adtran Inc and Ciena Corp , Morgan Stanley analyst Ehud Gelblum said in a research note.
AT&T also plans to expand its high-speed wireless network based on the Long Term Evolution (LTE) standard to cover 300 million people, or most of the country, by the end of 2014. Its previous plan called for coverage of 250 million people by the end of 2013.
In comparison, bigger rival Verizon Wireless, a venture of Verizon and Vodafone Group Plc , says it will have upgraded its entire network with LTE by the end of 2013.
Ralph de la Vega, the head of AT&T's wireless business, said AT&T's upgrade plan calls for much deeper coverage than its bigger rival. "We might be more conservative in what we call ready than the other guy," he told Reuters. "If we can do it sooner we will but we're not going to compromise coverage."
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In its efforts to expand beyond just cellphones AT&T plans to start offering a wireless home security services early next year. It has also signed agreements with key car makers for its connected-car initiative, according to de la Vega who declined to provide details about the car deals.
The company has set a goal for these businesses to become $1 billion annual revenue opportunities. Asked when he hopes to reach this goal de la Vega said it could be in "two to three years or four to five years.
(Reporting by Sinead Carew in New York; editing by Gerald E. McCormick, James Dalgleish and Matthew Lewis)