Introduction
In today’s financially and geopolitically turbulent times, telecommunications and digital technologies are among the fastest-growing business sectors. Even during the global lockdown, the representatives of corporations in this segment suffered the most negligible losses. However, to understand the full potential of further economic growth, any business’s owners should make long-term plans and strategies.
This process is aided by understanding how the capital market functions, as it is the part of the market where free capital is redistributed to invest in profitable assets. The financial analysis of the AT&T telecommunication company demonstrates that the company understands the importance of long-term planning and sustainable long-term approaches while paying less attention to short-term ones.
Executive Summary
A set of recommendations was generated when considering AT&T Corporation’s financial performance and the corresponding analysis performed under the given scenario conditions. The company’s current financial strategy is ineffective despite successfully normalizing the financial situation after a loss-making year in 2020 and obtaining better results than the previous year in 2019. The favorable economic environment at the peak of the case situation is optimal for strengthening the company’s position in the telecom and entertainment markets and investing more leverage in development.
Organizational Profile
AT&T Corporation was chosen as the company to analyze and evaluate these scenarios. As a provider of telecommunications services, AT&T Inc. also successfully provides data, Internet, wired, and wireless communications services. In addition, the corporation installs and maintains all related equipment, including managed networks, and is involved in retailing certain systems. To date, the company has also been involved in the development and implementation of some innovative technologies related to telecommunications and integration into the entertainment media sphere. AT&T’s digital content and services are available not only to corporate customers but also to individuals.
In addition to its related divisions and offshoots, the company owns the Cricket, Unefon, and SKY brands. The competitive landscape of the organization includes most of the major global players, including Vodafone, Verizon, and Orange, because it is a multinational company that operates in North and South America, Europe, Asia, Africa, and the Middle East. The field of activity of the company allows one to pay attention to the peculiarities of the formation of strategies and long-term goals. Highlights of such plans include blending entertainment and telecommunications, increasing payouts to shareholders while reducing net debt, and expanding network quality and coverage to increase popularity and return on investment.
The Telecommunications and Entertainment Business
Content consumption has increased significantly with the popularization and proliferation of the digital space. Consequently, many serious players in the market have become interested in investing in, creating, or buying businesses related to the production and distribution of such content. AT&T is no exception, as the company’s consumer segment includes a variety of customer categories and requires a large selection of services. Its own telecommunications capabilities back up the company’s decent entertainment options. Therefore, AT&T has more control over the process and has reduced costs, given its coverage.
With its core business of radio, optical, and cable communications, the company has set itself the goal of fully and harmoniously combining the telecommunications and entertainment markets after the start of media content production. Such a long-term strategy is capable of raising the company’s revenues and reputation level in the long term, with almost stable growth of costs and access to new and diverse markets. This factor also contributes to the growth of the company’s competitiveness, as most of its direct competitors do not have such diversification of services.
Developing Mobility and Broadband Connections Technologies
Broadband, maximum coverage, and mobility are also among the company’s top strategies. For example, offering unlimited data and Internet plans has helped the organization’s Mobility division rank among the top three wireless carriers in the brand’s home country, the United States (Curwen & Whalley, 2022). Another example of the company’s development is the Fiber service, which is a combination of satellite and fiber-optic Internet laying and is capable of providing download speeds of up to 5 Gb/s (Team, 2019). At a relatively affordable cost, AT&T’s services are popular. In addition, the abundance of mobility and unlimited plans are designed especially for younger generations, underscoring the long-term and winning strategy of providing high-quality such services.
Increased Annual Distributions to Shareholders
Annual distributions to shareholders are called dividends and are paid based on stock price and a set percentage. Seeking to increase this percentage is a long-term strategy for a corporation to attract investors and increase revenues. Today’s payout percentage exceeds 7%, which is a reasonably high dividend yield (Drury, 2022). At the same time, the payout depends on fluctuations in the stock market. Stock appreciation is a sign of sustainable growth and development of a company, which all organizations strive to attract investors and financial stability.
The Ratio of Net Debt to Earnings
EBITDA implies earnings before depreciation, taxes, interest, and the ratio of net debt to this ratio is one of the factors characterizing an organization. Reducing this ratio is AT&T’s goal, which can signal an increase in income or a decrease in the amount of debt and shows an improvement in the company’s overall financial position. The implication is that the organization is paying off debt without bankruptcy.
The Federal Reserve System
The Central Role and Functions of the Federal Reserve System
The Federal Reserve System is the center of the U.S. banking system and arose as a result of the need to adjust the financial system and eliminate the effects of crises. This central banking authority manages money, and its influence on capital markets should not be underestimated. The cost and availability of credit to the economy, along with interest rate adjustments, are part of monetary policy and are the core functions of the Federal Reserve.
As determined by the appropriate government agencies, fiscal policy affects the welfare of individuals and organizations, exchange rates, and stock price levels. This functionality achieves the primary purpose of the Federal Reserve System: to intervene in levels of production and employment, inflation, and spending (Svensson, 2020). Adjusting stock prices and exchange rates is likewise possible to control investment processes in the economy and stabilize prices.
Another function of the Federal Reserve is to monitor the international situation. Risks arising in the global economy are assessed, and in some instances, intervention strategies are formed to correct and counteract them. By developing the efficiency of settlement systems, banking industry services increase the reliability and security of the country’s individual and global financial systems. Payment facilitation systems play a role in helping fellow citizens with financial transactions of any kind. Another example of such activity is the Federal Reserve’s oversight of electronic transaction flow, cashing, and supporting check transactions.
Operational Mechanics of the Federal Reserve System
The operating mechanics of this government unit are similar to those of similar institutions in developed countries. The system includes twelve major Federal Reserve Banks, assisting with closer supervision, information gathering, and analysis for subsequent reactions (Svensson, 2020). In addition to subordinate banks and their management, the Federal Reserve itself has two more central regulatory bodies: the Federal Open Market Committee and the Board of Governors. The Federal Committee monitors the markets and is responsible for the relevant segment of the economy. The Board of Governors is accountable to Congress and is the auditing body for the Reserve Banks and managers of the organization.
The executive branch, however, has no direct influence on Federal Reserve decision-making because there are no narrowly focused supervisory organizations other than those mentioned above. Independence in decision-making provides the government and citizens with confidence in the stability and control of the financial system. Thus, the operational field of the Federal Reserve includes not only the regulation of the banking system but likewise assessments and adjustments of the results of such regulation to determine national monetary and credit policy policies.
Federal Reserve’s Potential
The potential of the supervisory authority to influence capital markets is significant and evident by virtue of the Federal Reserve being the main instrument of the state in this area. Direct changes in monetary policy can be represented by a number of examples, and each of them has a significant contribution to the economic situation. Expansionary monetary policy is mainly used to strengthen. The key actions in such strategies involve buying government securities on the open market to increase demand for them, injecting money into the economy, and raising prices.
In addition, interest rates are lowered, or securities are repurchased for quantitative easing. Suppose there is still room for interest rate cuts for capital adjustments to accelerate the economy. In that case, this opportunity is fulfilled, an example of which is the Great Recession, which led to a rate cut to 0% in 2008 and the subsequent buyback of government securities (Svensson, 2020).
Another example of the potential impact on capital markets is the Federal Reserve’s reduction of banks’ required reserves. Such reserves are conditional on the amount of customer deposits and can be partially released by reducing the official provisioning percentage. In this case, banks have a more significant opportunity to lend, further stimulating the economy.
Scenario Macroeconomic Events and Their Impact
Based on the data provided in the scenario, the positive macroeconomic trends contributed to the improvement of prospects and conditions in the labor market. In this case, the Federal Reserve’s actions are appropriate: the federal funds rate was raised. Without risking an increase in inflation, further gradual rate hikes are planned. This cause should help to strengthen the labor market and economic activity. The overall impact on the economy is positive, but the unemployment rate is still too high, which, among other concerns, is affecting the purchasing power of potential AT&T customers.
Considering the information provided, one can be sure of further interest rate hikes in the near future, as the Federal Reserve is almost obliged to take advantage of this moment to raise federal funds rates. However, with the fact that the economy is accelerating, interest rates, which were lowered by the Federal Reserve during the crisis in large part due to the pandemic, might be raised. According to the course, this outcome is not good enough for the market and will stop growth, but it will reduce global recession risks (Al Breiki, 2019). However, this still leaves the risk of deviations from expectations due to economic sector instability.
AT&T in the Case Scenario
The impact of the situation on AT&T Corporation is ambiguous, as there may not always be predictable changes. However, under the given conditions, the increase in the federal funds rate has a positive effect on the value of the company’s shares. Thus, their rise of 5.5 cents has already been seen at the time of the situation assessment (AT&T Inc. (T) stock price & news, 2022).
AT&T’s capital expenditures align with similar levels of significant competitors and are not above average. At the same time, increased asset values and new tax legislation have contributed to benefits, dividend generation for investors, and reputational growth (Mader et al., 2020). Thus, in terms of the scenario, the situation is quite comfortable for the further growth and development of the corporation.
Potential Financial Risks to AT&T
The Federal Reserve’s efforts are not always aligned with the goals and priorities of specific companies, and AT&T is no exception. Increasing the overall level of employment with stable prices is not the primary aspiration of a corporation at the moment. On the other hand, the normalization and development of financial and economic activity, which the Federal Reserve promotes, enhances the ability of companies to operate. There are a large number of risks and potential problems for the organization when the Federal Reserve conducts its standard policies at the macroeconomic level. These risks are provided by AT&T’s international presence and the slow growth of interest rates.
Risks Identification
- The risk of loss of revenue implies discontinuing or reducing the frequency of cooperation with groups of customers or suppliers. Thus, productivity or logistics may also suffer.
- The risk of competition is a constant problem, especially in a developing economy. In such circumstances, not only is the growth of major competitors possible but the entry of new entrants into the market is also facilitated. New companies with much less coverage may have the potential to provide unique or innovative services, which does not positively contribute to the number of loyal customers of all industry leaders in the market. Proving superiority in such a case would require additional effort and financial expenditure.
- The risk of production problems is minimized in AT&T’s case because the company does not have large production volumes. However, delays in installation, setup, or maintenance can cause significant harm.
- In addition to liability sharing issues, the risk of cooperation also includes the potential for breach of obligations, late deliveries, or non-compliance with environmental regulations, which can lead to legal problems.
All of the above risks must be taken into account as possible in the context of ambiguous forecasts at the peak of economic growth.
AT&T Risk Ratios
Debt/Capital Ratio
Risks are measured using standard tools and calculations of the company’s financial ratios. The most relevant data are for the fiscal year 2021, which is used in calculations (Financial Reports, 2021). Among the first to be assessed is debt capital risk, which implies the organization’s inability to repay its own debts if necessary. Such a situation may arise when financial results fall and require the liquidation of some assets to repay debt capital. The formula is a ratio of debt to total capital, which itself is a derivative of the amount of debt and equity. Thus, the debt of $152.72 billion / total equity of $551.622 billion = 0.277 or 27.7%. This percentage is not high and signals the current minimal risks of a debt-to-equity ratio.
Debt/Equity Ratio
The debt/equity ratio compares long-term liabilities to the amount invested by the owners and the profits that accrue. Among other things, this ratio is one of the leading indicators when considering the financial health of an organization in an audit or lending. However, the minimum ratio result is also not optimal because it can denote not only the accumulation of large amounts of equity but also a suboptimal allocation of funds. Prudence and rationality can contribute to lost growth opportunities and low profits, which is unacceptable in many modern companies.
Moreover, without a sufficient level of investment and spending at the current rate of development in AT&T’s digital and telecommunications industry, the pursuit of peace and stability is likely to turn into bankruptcy amidst a strengthening of competitors. The calculation is done accordingly based on the data provided: $152.72 billion / $183.86 billion = 0.83 (Financial Reports, 2021). Thus, AT&T’s debt-to-equity ratio is not high enough to actively develop and satisfy shareholders’ desires for substantial dividends. For a company in this industry, a ratio of less than two may contribute to staying behind in the competitive race.
Interest Coverage Ratio
Another assessment tool is the interest coverage ratio, which is responsible for determining a company’s ability to pay interest on outstanding debt. This debt-to-income ratio involves dividing AT&T’s earnings before taxes and interest, or EBIT, by the interest expense in the relevant period. Some formulas may use EBIAT or EBITDA, depending on the specifics of the company. When compared over shorter periods, the metric provides an adequate measure of a company’s short-term financial health. Investors, creditors, and shareholders use the indicator when determining the risk of investing in a company. In this case, the indicator is calculated as earnings of $33.381 billion / interest of $6.884 billion = 4.91. This figure indicates AT&T’s low risk of default and can be positively evaluated by potential investors.
Degree of Combined Leverage
The degree of combined leverage refers to the combined financial and operational leverage and refers to their impact on the company’s earnings per share. Combined leverage in this situation becomes more apparent in its relation to earnings. The degree of operating leverage equals dividing the percentage change in the company’s profit of 264%, provided by the low level of profit in the previous period, by the percentage change in sales -1.6% and equals -165%, which is directly related to the unsuccessful year of the pandemic (Financial Reports, 2021) in terms of the number of costs. The degree of financial leverage is determined by dividing the percentage change in EPS of 465% by the percentage change in earnings of 264%, which equals 1.76%. The combined leverage, in this case, is -290.65%, which denotes unbought loans in the previous period with no profit.
Recommendations: Risk Management Strategies
- The risk of profit loss is multifaceted and must be considered comprehensively. Moreover, its minimization requires an integrated use of long-term and short-term strategies. It is not possible to eliminate this risk entirely, but a combination of the two main strategies is recommended. Loss prevention and reduction principles should be implemented and used in parallel with Retention (Al Breiki, 2019). The first principle accepts the impossibility of eliminating risks and seeks to minimize them. However, the proof of the importance of the second principle is in its protraction – some minimal losses can be accepted to avoid significant losses in the long run.
- The risk of competition is even higher than the risk of loss of benefits and expenses. The main method to combat it is risk retention, which is achieved by adopting and working out methods to combat and reduce risk (Al Breiki, 2019). Such reduction can be achieved by increasing the competitiveness, relevance, and attractiveness of the brand to customers.
- The risk of production problems, and in this context AT&T’s service problems, can be eliminated by avoidance. For example, outsourcing some equipment can minimize the risk of spending or problems due to breakdowns. Insurance of all possible aspects can also be attributed to the benefits of choosing this risk management strategy.
- Cooperative risks should also be subjected to an avoidance method if possible. This principle is very close to long-term planning and helps lower the risk level before it occurs (Mader et al., 2020). An example of this would be a thorough financial check on a new supplier and rejection in case of suspicion.
Financial Strategies
In the case of AT&T, an aggressive investment strategy is recommended. The company’s far-reaching planning horizon demonstrates its stability and planned development (Mader et al., 2020). Moreover, if the Federal Reserve subsequently raises the value of the funds, the value of the company’s stock could increase. In a longer-term format, value investing can also be applied (Drury, 2022). This type is the optimal method when investing in undervalued stocks. AT&T’s primary investment should be in the information technology field and selecting to buy or collaborate with small companies that are successful in such developments.
Funding Strategies
In order to strengthen the market position and continue to grow, much of AT&T’s funding should come from banks. It will help reduce the debt-to-capital ratio, which is far too small for an actively growing organization (Mader et al., 2020). A smaller portion could be a combination of venture capitalists and equity crowdfunding principles in innovative developments. Despite the massive amount of assets a company has, conducting a marketing campaign with its own media content can raise significant funding through such crowdfunding.
Ethical Considerations
Each of the proposed strategies has no ethical constraints. Their main goal is the company’s development, which will entail an improvement in quality and a reduction in the cost of services, which will not violate legal norms and regulations. The company’s expansion also benefits the shareholders, as the dividends will increase proportionally to the income. However, there can only be a problem with equity crowdfunding ideas because the company’s size is not properly organized (Mader et al., 2020). Correctly presenting information in the form of emphasizing the benefit of the average investor in such a case would increase the amount of leverage and give them more opportunities to invest and develop.
Conclusion
In conclusion, the priority of the capital market and long-term planning over short-term planning for AT&T Corporation can be confirmed as an apparent fact. The telecommunications giant operates confidently in the market and demonstrates sustainable development and effectiveness. However, the dynamic pace of this development and the introduction of new services, products, and technologies is not always sufficient for unambiguous leadership in the industry.
References
Al Breiki, M., & Nobanee, H. (2019). The role of financial management in promoting sustainable business practices and development. SSRN Electronic Journal. Web.
Curwen, P., & Whalley, J. (2022). In the USA, operators and regulators lurch towards 5G: A regular column on the information industries. Digital Policy Regulation and Governance, 24(1), 106–108. Web.
Drury, K. (2022). Can investors trust AT&T’s juicy 7% dividend? The Motley Fool. Web.
Financial Reports. Annual report 2021 | AT&T. (2021). Web.
Google. (2022). AT&T Inc. (T) Stock price & news. Google Finance. Web.
Mader, P., Mertens, D., & van der Zwan, N. (2020). The Routledge international handbook of financialization. Routledge.
Svensson, L. E. O. (2020). Monetary policy strategies for the federal reserve. National Bureau of Economic Research.
Team, T. (2019). How does AT&T make money? Forbes. Web.
