Running head: FINANCIAL ANALSYIS

AT & T Financial analysis

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Institution
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Introduction

The AT & T Company is a leading telecommunications industry in media communication

and entertainment. It operates under various segments such as entertain group, business solutions

and consumer mobility. The company organizes business into both consumer and business

services. It was incorporated in 1983 as a holding company and its subsidiaries that offer digital

and communication services. We shall discuss the financial ratios of the company in the

following segment.

Income statement

The compound annual growth rate for the past five-year investment is 32.3%. The AT &

T net profit CAGR is higher than the sector median in recent periods. The median

telecommunication service sector has a net Profit CAGR of -4.3% over the five year period. The

figure is used by investors to make forecasts for future sales or compare alternatives for their

capital. The compound annual growth rate smoothes the annual return in the next period so that it

would be easier to compare the alternatives over the period under review. The CAGR for AT &

T was 1.82% but customer satisfaction was only -0.58%.

The AT & T revenue growth for the past three years has been erratic. For example, in

2015, the company reported revenue of $146801million that increased to $163786million in

2016 and later deteriorated to $160546million in 2017 financial years. In 2018, the AT & T

Company reported -2.14% decrease in revenue by the second quarter compared to the same

quarter in 2017. The second quarter decrease in revenue compares unfavorably to its peers in the

communication service industry and the service sector in general which had an average revenue

increase of about 18.6%. An average growth of 2.49% was achieved in the second quarter. The

cumulative revenue growth is expected to decrease by -2.2% over the next 12 months.
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A three-year growth rate of 5% and a five-year growth rate of 3% has been witnessed

over the last periods. A total of $146.801 billion in sales was generated last financial year and

it’s expected to grow to $177.402 billion in the coming five years. The AT & T projected growth

rate is 3.9% which will result in about $177.402 billion in the next five years. The estimates

stated above reflects the historical understanding of the firm results in terms of population

growth, market demand, product obsolescence, and market churn.

Margins

The gross margins have been decreasing from 54.33% in 2015 to 53.06% in 2016 to

51.8% in 2017 and slightly increased to 52.65% in 2018. The operating margin has been

decreasing from 16.88% in 2015 to 14.87% in 2016 and 13.05% in 2017. The operating margin

slightly increased to 13.62% in the second quarter of 2018. The net margin reduced from 9.09%

in 2015 to 7.92% in 2016 and increased to 18.34% in 2017 and further increased significantly to

20.4% in 2018.

Earnings dividend and free cashflow

The basic earnings per share for the company increased from $2.10 in 2016 to $4.77 in

2017. Prior to 2016, the EPS had deteriorated from $2.37 in 2015 to $2.10 in 2016. The earnings

per share for the past trailing twelve months is $4.63. In 2013, the earnings per share were $3.39

while in 2014 was $1.19. The dividend per share has been increasing over the past five years

continuously. For example, in 2017, the dividend per share was 1.97 while in 2016 was $1.93.

There has been significant growth in dividend per share of $1.81, $1.85, and $1.89 respectively

for the years 2013, 2014, and 2015.

The AT & T Company has been paying a quarterly dividend of $0.5 with an average

yield of 6%. AT & T has a dividend yield of 5.78% in September 2015 that later deteriorated to
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4.5% in 2016 and later increased to 5.3% in 2017 and has been increasing to 6.2% in 2018. The

AT & T has a payout ratio of 155% with a lower divided coverage ratio of 0.65.

The retained earnings per share of the company have been on the upward trend for the

past five years. Between December 2017 and March 2018 the retained earnings per share

increased significantly from $6.8 to $7.8. The retained earnings per share in 2014, 2015 and

2016 was $4.68, $5.2 and $6.5 respectively.

The free cash flow has been increasing continuously for the last five years. The AT & T

Company has a free cash flow of $19.813billion as of September 2018. The free cash flow has

been calculated by subtracting the operating cash flow from the capital expenditures. The free

cash flow for 2017 was $18.504 billion representing an increase of 3.795% from 2016. The

annual free cash flow for AT & T in 2016 was $17.825billion which represented a 7% increase

from the previous year. In 2015, AT & T recorded an annual free cash flow of about $16.662

billion which represented 64.34% increase from 2014.

Liquidity analysis

The total debt of the company declined from 2015 to 2016 and thereafter decreased from

2016 to 2017 which exceeded the 2015 level. Since the year 2013, the total debt were

$74.788billion, $82.067billion, $126.151billion, $123.513billion and $164.346billion

representing years 2013, 2014, 2015, 2016 and 2017.

The current ratio for AT $ T was 0.75 in 2015. It increased to 0.76 in 2016 and 0.97 in

2017. The current ratio has further deteriorated to 0.81 in 2018. The company’s ability to offset

short-term obligation has been on the upward trend over the period except in 2018 which had a

slight decrease. Just like the current ratio, the quick ratio was 0.75 in 2015 and 0.76 in 2016 and

0.97 in 2017. Currently, the quick ratio has reduced to 0.81.

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Capital structure analysis

The current debt to capital ratio of AT & T is 0.54 representing an increase from the

previous year of 0.50. The debt to capital ratio has been increasing over a period now. The debt

to capital ratio of AT & T reached 0.51 in 2015 up from 0.48 in 2014 and 0.44 in 2013. Both

equity and debt increased significantly in 2015 because of the acquisition of the DirecTV. The

debt to capital ratio reduced significantly from 2016 to 2017. Its closest competitor, the Verizon

had a higher ratio of 0.87 by December 2015.

The debt to equity ratio has increased significantly since 2013. The recorded debt to

equity ratio increased from 0.82, 0.95, 1.03, 1.00 and 1.17 in the years 2013, 2014, 2015, 2016,

and 2017 respectively. The AT & T Inc. debt to equity ratio deteriorated slightly from 2016 to

2017.

The annual interest expense increased from 2014 to 2017. In 2014, the annual interest

expense was $3847m that later increased to $4917m in 2014, $5802m in 2015 and finally

$7203m in 2017. The annual interest expense, in this case, refers to the interest expense incurred

for the period of arrangement of debt which was charged on earnings. In some years the interest

expense included the total interest incurred in the period and either charged or capitalized on the

earnings.

The debt service coverage ratio is approximately 1.32 above the recommended ratio. AT

& T has accumulated more debts in recent past due to major acquisitions in the

telecommunication industry such as Times Warner. Its bond rating has reduced in the process. In

2017, the debt service coverage ratio was 1.21 and in 2016 was 1.24. The company is now

having higher repayment for its interest and cannot fully pay its obligations within one year due

to the reduced amount of available cash flow.

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The bond rating of AT & T was downgraded to Baa2 from Baa1 due to the company’s

increased leverage after merging with Time Warner Inc. with $81 billion approximately added to

the balance sheet. The S&P reduced the rating to one level of BBB. The AT & T was

downgraded by Moody’s investor’s services since it accumulated more than $180million load of

debt after the acquisition of Time Warner Inc. This implies a reduction of their bond rating. The

AT & T will be forced to refinance huge amount of its debt per annum. The bond rating of the

company deteriorates to Baa2 which represents two levels of the speculative grade. The company

is highly exposed to the capital markets. The debt of the company has been increasing since 2014

at $81.8b, 2015 was $126.2b, 2016 was $123.5b, 2017 was $164.3b and currently is $163.0b

before acquisitions of Time Warner Inc.

The AT & T shares issued and authorized are $7260m as at the end of September 2018

which represents 18.41% increase from the previous year. In 2017, the total outstanding shares

were $6.183billion representing a 0.1% decrease from the previous year 2016. The total

outstanding shares which include both issued and authorized were $6.189billion representing a

9.62% increase from the previous year of 2015. In 2015, the AT & T had issued and authorized

shares that amount to $5646 million representing 8.14% increase from the previous year’s 2014.

The diluted shares outstanding during the quarter that ended in June 2018 was $6374 million.

The book value of equity is currently $183457 million. In 2013, the book value was

$91.48b and later reduced to $90.27b in 2014. In 2015, the market book value of equity

increased to $123.6billion and later $124.11billion in 2016. In 2017, the value increased

significantly to $142.01billion and a further $184.97billion in 2018. Generally, the market value

of equity has increased following major acquisition such as Times Warner Inc.

Pro forma income statement figures in ($billion)

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12/31/2017 12/31/2016 12/31/2015 12/31/2014

Total revenue 160.546 163.786 146.801 132.447
Cost of 77.379 76.88 67.046 60.145
revenue
Gross profit 83.167 86.902 79.755 72.302
Operating
expenses
Sales general 37.831 36.708 32.654 41.817
and
administration
Other 24.387 25.847 22.06 18.273
operating
items
Operating 20.949 24.347 24.785 12.212
income
Additional 0.618 0.277 0.052 1.581
income/
expense
EBIT 21.439 24.77 24.812 13.968
Interest 6.3 4.9 4.1 3.6
expense
Earnings 15.139 19.812 20.623 10.355
before tax
Net income 29.450 12.976 13.345 6.442

The net income has consistently increased from 2013 having $6.442 billion to 2017 with

$29.45 billion driven by increased total revenue and reduced sales and general administration

expenses.

Reference

https://www.gurufocus.com/term/current_ratio/T/Current-Ratio/AT&T%20Inc

https://www.gurufocus.com/term/current_ratio/T/Current-Ratio/AT&T%20Inc

https://www.nasdaq.com/symbol/t/financials?query=ratios

https://www.marketwatch.com/investing/stock/t/profile

https://ycharts.com/companies/T/current_ratio

https://seekingalpha.com/article/4113759-ratio-analysis-verizon-and-t
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https://www.thestreet.com/r/ratings/reports/analysis/T.html

https://www.bartleby.com/essay/At-T-Financial-Analysis-F38KAZNBC

https://simplywall.st/stocks/us/telecom/nyse-t/att/news/how-financially-strong-is-att-inc-

nyset/