AT&T's Acquisition-Driven Leverage Rise Tests Credit Stability Amid Equity Growth Narrative

What happened

AT&T's recent fiber and spectrum acquisitions are set to increase net debt-to-EBITDA to around 3.5x, raising credit risk and potential downgrades for its preferred shares, which yield just over 6%. The DeepValue master report maintains a BUY stance on the equity, emphasizing durable Mobility cash flows, a growing FTTH base with convergence benefits, and manageable leverage at 2.8x, supported by policy tailwinds and improving margins. However, the article highlights a disconnect as aggressive investments strain the balance sheet, contrasting with the report's optimistic view on deleveraging post-2026 capex peak. This tension underscores the company's challenge in balancing growth ambitions with financial discipline, especially as preferred shares face junk status threats versus higher-rated alternatives. Investors must reconcile near-term credit pressures with long-term operational improvements driven by network modernization and spectrum enhancements.

Implication

The increased leverage from acquisitions elevates borrowing costs and credit downgrade risks, particularly for preferred shares, necessitating a reassessment of fixed-income exposures in favor of more secure alternatives. Equity holders face heightened volatility if FCF shortfalls or capex overruns delay deleveraging, potentially undermining the BUY thesis and shifting focus to operational metrics like postpaid net adds and fiber penetration. Preferred share investors may find better value in higher-yielding, better-rated options, but must weigh this against AT&T's underlying asset strength and potential recovery from integration benefits. On the upside, successful acquisition integration could boost network capacity and competitive positioning, supporting long-term cash flows and validating the equity growth story if execution risks are managed. Overall, the investment landscape requires a bifurcated approach: cautious on credit instruments and vigilant on equity performance indicators to navigate the balance between growth and financial stability.

Thesis delta

The equity thesis remains intact but is now tempered by increased near-term financial risk from rising leverage, which could pressure credit ratings and borrowing costs. If debt levels exceed projections or FCF underperformance persists, confidence in deleveraging and capital returns may erode, potentially shifting the stance from BUY to HOLD. However, the core growth drivers—Mobility durability, fiber convergence, and policy catalysts—still support a positive outlook provided execution on Open RAN and spectrum deployment stays on track.