S&P may lower AT&T’s (NYSE: T) credit rating, on the heels of Sprint-Nextel (NYSE: S) posting a widening loss.

“AT&T Inc. may not be able to achieve financial metrics fully supportive of the current rating within a reasonable time frame,” S&P said.  AT&T’s ‘A’ corporate credit rating and the ‘A-1’ short-term and commercial paper ratings were put on CreditWatch with negative implications. “We expect that a potential downgrade of the corporate credit rating, if any, would be limited to one notch,” S&P noted further.

The AT&T rating pressure damns the entire industry for its underlying problems. Telcos with residential landline services are losing customers to VoIP and cell phone use. Cell phone subscriber growth is slowing because of a near-saturation of the US market. Sprint has 49 million subscribers, AT&T and Verizon Wireless each have about 90 million.

S&P is not terribly concerned with AT&T’s balance sheet. The ratings firm argued that the telco has plenty of cash flow to cover its $10 billion dividend. One of the unspoken messages from S&P is that AT&T may not be able to increase that dividend and comfortably handle is debt service.

“The company’s debt leverage is weak for the current ‘A’ rating, given our assessment of the business profile as strong; for the 12 months ended June 30, 2010, debt to EBITDA was 2.4x, including substantial adjustments for post-retirement benefits and operating leases.”

The shares of three large cell service providers have become what they were before the debut of the cellular phone: low-growth high yielding stocks.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.