Will This Gamble Put AT&T on Top?

AT&T (NYSE:T) announced Wednesday that it would boost capital spending by about 16 percent to $22 billion a year for the next three years to upgrade its wireless and wireline networks.

Rival Verizon (NYSE:VZ), the nation’s largest wireless network, is currently way ahead in high-speed mobile services, so AT&T will be playing catch-up. AT&T also must improve its rural phone lines, which are comprised of outdated copper technology.

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The company hopes the investments will boost revenue growth by opening up new opportunities, such as adding wireless connections to cars and home security. Ralph de la Vega, the head of AT&T’s wireless business, said AT&T aims for these businesses to become $1 billion in annual revenue opportunities in two to five years.

AT&T was previously considering selling some rural phone lines, but in Wednesday’s announcement, said upgrading its wireline network was ultimately a more attractive option. According to Hudson Square Research analyst Todd Rethemeier, AT&T was forced into the upgrade option because it could not find a buyer.

“They’re doing it because they really have to do it,” said New Street Research analyst Jonathan Chaplin, adding that “the pay-off is unclear.”

Shares moved lower after the announcement as investors worried about the spending hike from AT&T’s 2012 capital budget of $19 billion to $20 billion.

AT&T said the investment would lead to revenue growth 100 basis points above the U.S. gross domestic product, supporting earnings-per-share growth in the mid-single-digit percentage range for the next three years.

Chaplin was unimpressed with the growth targets. “It looks like a giant boost of spending for the results we thought (they’d produce) all along,” he said.

The three-year plan includes a budget of $8 billion for expanding the company’s wireless network, and $6 billion for upgrading the wireline network. The move will boost capital expenses to the high end of its target for spending for the next two years, with spending returning to normal levels in 2015.

AT&T plans to take advantage of historically low interest rates to tap debt markets. Chaplin said he expects AT&T to partially offset increased spending by using additional financing to buy back shares.

The company also said it would raise its quarterly dividend from 44 cents to 45 cents per share.

AT&T plans to upgrade its wireline network with fiber, reaching another 1 million business customers, and will provide high-speed Internet to 75 percent of wireline customer locations. It will expand its U-verse services, which include high-speed Internet and cable television, by a third to cover 43 percent of its network by the end of 2015.

AT&T also plans to expand its high-speed wireless network based on the Long Term Evolution (LTE) standard. The company wants to bring LTE coverage to 300 million people, or most of the country, by the end of 2014.

Verizon says it will have upgraded its entire network with LTE by the end of 2013.

AT&T’s increased spending may be rattling investors, but companies like Alcatel Lucent (NYSE:ALU), its main equipment vendor,  have everything to gain from the AT&T investing in infrastructure.

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