What's Propping Up AT&T?

The September employment survey from the Bureau of Labor Statistics says that telecommunication industry employment has fallen by 302,000 since it peaked in March 2001. Helping inflate that number for 2004 is AT&T's (NYSE: T  ) announcement that it plans to reduce its labor force by 20% (12,260 people) and take a $1.1 billion "restructuring charge." Yikes!

The company plans a noncash charge (sounds benign, doesn't it?) of $11.4 billion in the third quarter for "asset impairment." That will eliminate $1 billion in second-half depreciation -- and reduce free cash flow and reported earnings. Double yikes.

AT&T, busy reducing debt, expects to end 2004 with net debt of $7 billion -- a 50% decrease over the last two years. A signal to shareholders that life was getting better was a 27% increase in the dividend last fall. Life is good, right?

You might guess that if you looked at options. There were 792 million shares issued and, get this, options for 118 million shares outstanding at the end of 2003. That level of potential dilution makes non-option companies such as Berkshire Hathaway (NYSE: BRK.A  ) look really good.

If options are "pay for performance," the outlook must be bright. Right? Wrong. Based on the mean (ah, what a word in this context) analyst estimate, the company will go from making $0.50 a share in 2004 to losing $0.02 a share in 2005. Ouch!

Over the last 52 weeks, the stock has lost a quarter of its value. Motley Fool Income Investor readers will smile at the 6.3% dividend yield, knowing it is a sign of trouble.

Consider the competition. The restructured MCI (Nasdaq: MCIP  ) has net debt of only $550 million. Baby Bells Verizon (NYSE: VZ  ) , Bell South (NYSE: BLS  ) , and SBC (NYSE: SBC  ) recently won in court on pricing rules. Then there is Comcast (Nasdaq: CMCSA  ) and the cable companies wanting in to the long distance. And that is just a snapshot.

Add it up. AT&T does not look good. But restructuring could be window dressing for selling the company. That thought, and the big dividend, are two props holding this stock up. Both props look shaky.

Fool contributor W.D. Crotty owns stock in Berkshire Hathaway, SBC, and Verizon.

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