AT&T is investing heavily in capex
Now we’ll take a closer look at AT&T’s (T) future expected spending on capital expenditure (capex). AT&T has been investing heavily in capex to improve its network and buy additional spectrum for future use.
In 4Q16, AT&T spent ~$6.5 billion on capex, and it spent just under $23.0 billion in 2016. According to AT&T’s management, it expects its capex to ramp up, albeit not substantially, going forward as it continues to focus on integrated wireless and wireline business services.
AT&T is focusing on an SDN (software-defined networking) approach to transforming its network. SDN helps telecommunications companies to save on costs and provide more flexibility, as this approach requires them to virtualize their networks instead of spending on dedicated fixed hardware.
AT&T’s proposed acquisition of Time Warner (TWX) will help it to lower its capex investments, with minimal capex requirements at Time Warner balancing AT&T’s higher capex needs. As a result, AT&T will have more resources and opportunities to invest in 5G (fifth-generation) technology.
AT&T expects the acquisition to be accretive on a free cash flow growth (or FCF) per share basis in the first year after its closing. Also, AT&T has deleveraging potential within the first year of closing the deal given the attractive FCFs of the companies.
Expected capex investments in 2017
AT&T is expected to spend ~$22 billion on capex in 2017. In comparison, competitor Verizon (VZ) expects its capex to come in at $16.8 billion–$17.5 billion in 2017, whereas T-Mobile (TMUS) expects its cash capex to be in the range of $4.8 billion–$5.1 billion excluding capitalized interest.
Meanwhile, Sprint (S) expects its cash capex to be in the range of $2.0 billion–$2.3 billion in its fiscal 2016, which ended in March 2017, excluding the impact from leased devices sold through indirect channels.
AT&T and Verizon generated $39.3 billion and $22.7 billion, respectively, in operating cash flow in 2016, which gave them leeway to direct more toward capex.