A hefty dividend cannot hide AT&T’s big problem: not creating economic value added (EVA) for its capital holders.
Economists and financial professionals use EVA or economic profit to measure how effectively companies invest other people’s money – the money of shareholders and debt holders.
EVA is usually measured as the difference between Return on Invested Capital (ROIC) and Weighted Average Cost of Capital (WACC).
A positive EVA over a substantial period of time indicates that the management of these companies is creating value for their stakeholders over the capital markets, while a negative EVA suggests that management is destroying value – capital holders should look for better opportunities in other companies.
According to Guru Focus, AT&T has barely created any value for its equity holders.
In 2021, AT&T’s ROIC was 4.46%, while the WACC was 4%. So the EVA is 0.46%, well below the company’s 7.14% dividend. In essence, management returns capital to its shareholders rather than value.
AT&T’s low EVA is a poor exploration of business opportunities with low returns (eg failed acquisitions) and high leverage, driving up the cost of capital. For example, AT&T’s long-term debt of $162 billion is 1.5 times higher than its market cap.
Wall Street has noticed. Over the past five years, AT&T has lost nearly 37% of its value, with the overall market gaining 44% and its closest competitor T-Mobile gaining 124%.
And unless it finds new high-profit business opportunities, EVA could turn negative in an environment of rising cost of capital.
Nevertheless, management remains optimistic that things will change as it continues to invest in 5G.
“We are investing at record levels to enhance our 5G and fiber connectivity and provide the best experience in the market,” said AT&T CEO John Stankey 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 telephone network additions and approach the 1 million AT&T Fiber-net gains for the year.”
But Raj Shah, a managing partner at digital consultancy Publicis Sapient, is skeptical about the company’s direction.
“AT&T’s strategy of focusing only on the access layer is only fueling the lustrelcos desperate to break free,” Shah told International Business Times in an email. “While telcos envy the valuations of tech companies, they act like utilities and are valued like utilities. A determined commitment to be good at one thing gives AT&T a focus it didn’t have, but it’s not a strategy for long-term growth.” term. “