Can AT&T Adapt to Fiber and Wireless and Still Maintain Its Yield?

NEW YORK (TheStreet) -- So far, customers are giving AT&T  (T) the strength to get out of the copper-line phone business.

The company's finances are like the ocean, seemingly flat but roiling underneath. So-called "legacy" revenue, from the "Telephone and Telegraph" in the AT&T initials, continues to fall. But for now it's more than offset by gains in high-profit Internet Protocol, or IP, business and cellular.

For the quarter ending in March, AT&T reported earnings of 71 cents per share, beating estimates by a penny, on revenue of $32.5 billion, which was in line with estimates

According to the company's 8-K, wireless revenue was up 7% year-over-year, and the company gained 1.062 million net new wireless subscribers, selling 5.8 million smartphones to what are now 116 million accounts.

Its NEXT upgrade program, under which customers pay off phones in 20 months through their bills rather than getting a discount in exchange for a contract, is proving popular with both customers and AT&T accountants.

Shares fell overnight, but had risen earlier in the day on news the company is launching a new streaming video service with the Chernin Group, headed by a former President of News Corp. (NWSA)

The Chernin deal, headlined by an investment of $500 million, and the mobile phone gains are symbols of much bigger things happening on AT&T's balance sheet -- like the investments it still has to make in order to maintain its current 5.1% yield. Some of this was discussed in its earnings release.

AT&T had $5.8 billion in capital expenditure spending during the first quarter. It generated almost $8.8 billion in cash flow from operations. It needs almost $2.4 billion in earnings to fund its 46 cent per share quarterly dividend, and its board recently authorized a 300 million share buyback program, which could cost another $2.5 billion each quarter.

Must of that CapEx must go to its wireless service, where the company faces increased competition from T-Mobile (TMUS) and the deep pockets of Sprint's (S) new majority owner, Softbank, which is plowing gains from its investment in China's Alibaba back into the company in a bid to break the AT&T-Verizon (VZ) duopoly.

Part of the threat in wireless comes from the coming FCC auction of old TV spectrum. AT&T is threatening to skip the auction if its actions are limited by agency desires to bring new entrants to the business. But can it really afford to do that and let Sprint take the prize?

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