Investing.com -- S&P Global (NYSE:SPGI) Ratings has revised its outlook on the U.S.-based telecommunications provider AT&T Inc (NYSE:T). to positive from stable, citing solid earnings growth and improving credit metrics. The ’BBB’ ratings of the company have been affirmed.
AT&T has seen its business prospects improve over the past few years, with growth driven by healthy earnings in the mobile segment and increased penetration of its fiber-to-the-home (FTTH) broadband product. This has allowed the company to expand revenue and margins in the consumer segment.
The company’s leverage thresholds for the current ’BBB’ issuer credit rating have been revised by 0.25x to 3.25x to 4.00x from 3.00x to 3.75x to reflect a stable competitive environment in wireless and improving operating trends in consumer wireline.
AT&T has been successful in reducing its leverage and improving free operating cash flow (FOCF) since acquiring spectrum licenses in the C-band auction for $27 billion in 2021 and Auction 110 for $9 billion in 2022. The company’s debt to EBITDA ratio was about 3.3x as of Dec. 31, 2024, down from 4x in 2021.
S&P believes AT&T has a good chance of reducing leverage to below 3.25x by 2026, despite a more aggressive shareholder-friendly financial policy that will include share repurchases over the next few years.
AT&T’s business risk is seen as comparable with that of its closest peer, Verizon Communications Inc (NYSE:VZ). The company’s upgrade threshold has been revised to better align with Verizon, which has a downgrade threshold of 3.25x at the ’BBB+’ rating.
AT&T has been successful in growing postpaid phone subscribers around 2% annually through aggressive handset promotions. The company’s consumer wireline segment, which contributes 11% of AT&T’s revenue, has seen healthy revenue and earnings growth due to its FTTH investments.
The company expects to increase wireless service revenue around 2%-3% over the next few years, driven by industry-leading postpaid phone churn, higher lines per account, and steady average revenue per user (ARPU). AT&T’s EBITDA is expected to increase about 3%-4% in 2025 and 2026 due to cost reductions, greater operating leverage, postpaid subscriber growth, and continued low upgrade rates.
AT&T has been aggressively building out its FTTH service and covers about 29 million passings. The company added about 2.4 million fiber locations in 2024, and it is expected to ramp up the number of passings to around 3 million annually through 2029.
AT&T’s business wireline segment, which contributes 15% of the company’s revenue, continues to face headwinds given its significant exposure to legacy products and services. The company plans to improve business broadband trends by increasing its fiber penetration with a focus on the small to midsize business (SMB) market.
Despite reaching its 2.5x leverage target in 2025, the positive outlook reflects S&P’s view that there is room for additional leverage reduction from earnings growth and modest free cash flow after share repurchases. AT&T’s adjusted debt to EBITDA improved to 3.3x in 2024 from 3.6x in 2023. The company is expected to have more than $50 billion of financial capacity over the next three years and will distribute $40 million over this period to share repurchase and dividends, while maintaining its net leverage in the 2.5x area.
S&P expects adjusted leverage to be around 3.3x in 2025, 3.2x-3.3x in 2026, and 3.1x-3.2x by 2027, primarily driven by earnings growth. The positive outlook reflects S&P’s expectation that low-single digit percent earnings growth coupled with modest discretionary cash flow (DCF) will enable AT&T to reduce leverage to below 3.25x by 2026, which could support a higher rating.
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