The Surprising Company Investing More Than $23 Billion In Its Future

Cell tower against a backdrop of dark clouds. Image source: author.

It's no secret that AT&T is huge. When a company pulls in $130 billion in annual sales, resulting in $34 billion of operating cash flow, that's not something you can hide under a rug.

But AT&T is big in many ways, including some that might surprise even the company's own shareholders. For example, did you know that AT&T invests more money into future growth drivers than any other American technology business?

It's true. Over the last four reported quarters, AT&T showed $23.2 billion of capital expenses according to Capital IQ data. That's nearly $6 billion ahead of telecom rival and No. 2 spender Verizon Communications . In fact, Intel  -- well known for investing heavily -- came in third-place.

Growth investments
Of course, some of these expenses are nothing more than maintenance budgets for AT&T's nationwide wired and wireless network operations. Keeping $114 billion's worth of operating assets in fighting shape isn't cheap.

Like most companies, AT&T doesn't separate growth and maintenance capital expenses in its financial reports. But you can make some educated guesses based on other data.

One way to do this is by using depreciation as a proxy for maintenance costs. If AT&T did its cash flow accounting correctly, this is a reasonable assumption. New asset installations should depreciate down to an effective value of zero over the effective life of that equipment, after all. So as the cash costs of new assets move through the income statement in the form of depreciation charges, the same item becomes a reasonable estimate of maintenance-related expenses.

Backing out AT&T's depreciation from its trailing capital expenses, then, leaves about $7.5 billion of growth-focused spending.

That's still the largest total in the tech sector, though things change elsewhere in the top five. Verizon falls to fourth place with just $2.4 billion invested in growth projects over the last year. Intel used $4.3 billion on new or upgraded chip manufacturing facilities, leapfrogging Verizon but still falling short of AT&T.

AT&T headquarters in Dallas, Texas. Source: Wikimedia Commons.

What is AT&T spending all this cash on?
What is AT&T doing with a $7.5 billion annual budget for growth-oriented infrastructure construction?

At a recent industry conference, AT&T's chief strategy officer, John Stankey, shed some light on the company's use of capital.

Left to their own desires, people want to entertain themselves They want to watch video, and if we think about what's scaled video consumption looks like over the next five years in this industry and the kind of network infrastructure that's going to be necessary to truly enable that, and the cost structure that will be required to manufacture the bits that can carry that kind of traffic, we're playing this for the long haul and the long haul is we generate cash, we reinvest the number one or two position in capital investment in the industry and we believe that that is a sustainable equation with competitive returns on invested capital.

Our job now is to shift the attack vectors. It's to take it to the next generation. It's not just price, but it's price, service, coverage, and what else people can do with their devices.

The way to get this done right now is twofold:

First, AT&T must reinforce its existing 4G LTE networks. The company can add base station hardware to more cell towers, add more LTE equipment to existing installations, and beef up the back-end networks that connect towers to the rest of the Internet. There's nothing complicated about any of these strategies, but it's expensive when you aim to cover the entire nation in high-quality data airwaves.

Second, AT&T is already working on the next generation of high-speed networking. Whether it will be called 5G or simply 4G Advanced, the industry is due for another data networking overhaul in the next few years. It's a little early to install production-level hardware yet, but a small portion of AT&T's cash expenses are going into preliminary work on next-generation networks.

If AT&T keeps outspending Verizon on next-generation networks and richer 4G installations, Ma Bell might eventually erase Big Red's claim to having the higher-quality network.

This is not a cheap strategy, but it is a great use of AT&T's massive cash flow. Heavy investments in the company's future might indeed be the only way to keep AT&T relevant as the wireless industry evolves over the coming years.