U.S. Telcos Struggle to Cover Cost of Capital

The big four telcos in the U.S. are not exactly raking it in. Between 2010 and 2018, AT&T, Verizon, T-Mobile USA and Sprint achieved an average aggregate return-on-capital employed (ROCE) of just 7%. The NYU Stern School of Business has estimated that the average cost of capital for the U.S. telecoms service sector is 6.9%. In 2018, aggregate ROCE was also 7%.

In other words, the industry is barely covering its cost of capital. Within that overall picture, some telcos are performing better than others. Verizon has been the best long-term performer on this measure, making an average ROCE of 10% across the nine years. T-Mobile USA has made an extraordinary recovery in the past six years, lifting ROCE to almost 10% in 2017 and 2018 from a low of -20% in 2012. But the company’s average annual ROCE for the decade is just 1%, underlining why it is pursuing the merger with Sprint.  Sprint is the weakest of the four, earning almost no return on the capital it has employed across the decade.

AT&T’s average ROCE in the 2010-2018 period is just 7%. The telco’s performance on this metric has been dragged down in recent years by a massive leap in the capital it has employed following the acquisitions of DirecTV and Time Warner.

The chart above is one of many in a high-level guide to the financial state of the U.S.’s top telcos. This new report enables long-term investors and policymakers to easily track the progress of the big four telcos - AT&T, Verizon, T-Mobile USA and Sprint - over the past nine years on a range of financial metrics.

The iPad edition is available here and the Kindle edition here.