Companies
AT&T, Verizon, and T-Mobile are three major telecommunications companies in the United States. Verizon has the widest and most reliable coverage, including rural areas. AT&T has good coverage nationwide with a focus on urban areas. T-Mobile’s coverage has improved but may still be weaker, particularly in rural areas.
While T-Mobile is known for its competitive pricing and affordable plans, AT&T and Verizon tend to be more expensive, but they also offer fast and reliable data networks. The paper provides a financial analysis of three companies based on their annual reports (AT&T, 2023; T-Mobile, 2023; Verizon, 2023). The assessment of capital structure and general conclusions is based solely on the financial information provided by these companies.
Capital Structure
Capital structure is often critical to investors’ assessment of companies’ investment attractiveness. In this work, an analysis of competitors is presented based on the most current financial indicators from the annual reports of three companies; absolute values are presented in Table 1.
Table 1 – Competitors Capital Structure.
Table 1 shows that all companies in this industry rely on borrowed capital more than equity capital. However, T-Mobile is less dependent on lending, while Verizon has the highest debt-to-equity ratio, calculated by dividing total liabilities by shareholder’s equity. AT&T remains in the middle, with a scale comparable primarily to Verizon, while T-Mobile has almost half the financials.
A capital structure that relies heavily on debt comes with many risks. First of all, the current conditions are dictated by lending conditions, which depend on the macroeconomic indicators of the country – inflation and the commercial rate in America are breaking historical records, which can affect both the liquidity and solvency of the companies in question (Trading Economics, 2023a; Trading Economics, 2023b). At the same time, debt capital formation as a priority imposes less responsibility on investors, improving indicators such as PE ratio or ROE.
As a result, maintaining a balance in this industry can be critical due to the need for constant technological development due to the influx of investment capital. Focusing on raising debt capital may be more straightforward, but in the current environment comes with many potential challenges due to macroeconomic determinants. AT&T maintains the most appropriate approach compared to competitors, keeping critical indicators of financial relations high.
Discussion
The financial health of these companies can be reflected by liquidity and efficiency indicators. If the capital structure primarily influences the free cash flow distribution strategy, then liquidity is reflected by the ratio of current assets to current liabilities. AT&T loses to its competitors in terms of liquidity: the company’s current ratio in 2022 is 0.59 versus 0.75 and 0.77 for Verizon and T-Mobile, respectively (AT&T, 2023; T-Mobile, 2023; Verizon, 2023). At the same time, Verizon and T-Mobile maintained relatively flat dynamics over three years in terms of profitability – the companies’ net income became slightly lower than in 2021 in 2022 but did not go negative, like the more active dynamics of AT&T (AT&T, 2023; T-Mobile, 2023; Verizon, 2023).
As a result, such values signal a more stable and financially healthy situation in Verizon and T-Mobile despite the latter’s significantly lower capitalization. However, AT&T’s poor performance is due to the significant use of free cash flows to repay long-term debt and increased capital expenditures, which may indicate increased competitiveness in the long term (AT&T, 2023). However, considering investment attractiveness, it is necessary to consider more financial relationships to build the best investment strategy.
Conclusion
ROE and P/E ratios favor AT&T, which, given the market leader, indicates growth potential. Verizon sits in the middle between the two companies – T-Mobile loses due to the scale of capitalization, and AT&T offers the best historical performance, which tends to lead to near-term stock price gains. However, it is necessary to hedge investors’ risks and spread the potential $50,000 across multiple stocks to diversify investor’s portfolios better.
In this regard, it is best to allocate a significant portion to AT&T’s assets since growth is expected in the short term, not to mention the company’s mentioned strategy of allocating funds to cover long-term liabilities. Verizon is exhibiting more consistent surge dynamics, which will help preserve capital against potential risks due to external determinants that could impact AT&T’s performance. Finally, T-Mobile also shows financially healthy dynamics; therefore, about 10% of the declared capital can be invested in this competitive company to monitor the technological side of the issue in terms of competitiveness since this industry is highly dependent on potential R&D developments.
As a result, a distribution of 60-30-10% is proposed for AT&T, Verizon, and T-Mobile, respectively, justified by the current position of the company and the growth potential of the shares based on ROE and P/E ratio. Although AT&T’s position appears to be the least healthy compared to its competitors, management’s financial strategy can ensure long-term strong returns as it repays debt early and frees up funds for new projects.
References
Trading Economics. (2023a). United States Fed Funds Interest Rate. Web.
Trading Economics. (2023b). United States Inflation Rate. Web.
AT&T. (2023). 2022 Annual Report. Web.
Verizon. (2023). 2022 Annual Report. Web.
T-Mobile. (2023). 2022 Annual Report. Web.