Tax reform would likely help Verizon and T-Mobile more than it would help AT&T, according to MoffettNathanson. And Sprint would see virtually no impact.
Cutting taxes has become a top priority for Congress under Donald Trump’s administration, and wireless carriers—like countless other companies—are very much in favor of the move. AT&T CFO John Stephens said recently that his company is “optimistic about tax reforms,” and T-Mobile CFO Braxton Carter said this week that T-Mobile likely wouldn’t be in a position to pay cash taxes for roughly the next seven years under tax bills currently working their way through the House and Senate.
But the four big U.S. wireless network operators wouldn’t benefit equally from corporate tax cuts, Craig Moffett noted this week in a research note.
“The magnitude of the benefit varies quite significantly from company to company,” Moffett wrote. “In telecom, for example, tax reform will disproportionately benefit Verizon and T-Mobile over AT&T and Sprint. AT&T’s historically low cash taxes, and low taxes in the forecast period, lessen the impact of incremental tax cuts. At Sprint, tax reform is irrelevant: there are no cash taxes anyway in our forecast period—the interest deductibility cap, which would otherwise be a headwind for the company, is irrelevant.”
Meanwhile, Dish Network—which is planning to launch a narrowband IoT network to leverage its significant pile of midband spectrum—would actually be hurt by tax reform, Moffett predicted.
“Of the companies in our coverage universe, only one company would be affected negatively from tax reform,” he continued. “At Dish, spectrum amortization already creates a tax shield that would under the proposed rules be offset by the capped interest deductibility, leading to lower cash flows under the new tax bill.”
One looming question, though, is what kind of ripple effect tax reform might have beyond carriers’ profits. Lower taxes could lead to increased capex, which would lift the tower segment, but they also might increase competition if they spur carriers to focus on growing market share.
“Of course, one could argue that the benefit of tax reform could simply be competed away, particularly in the most competitive sub-segments of the market (e.g. in wireless),” Moffett wrote. “That is, carriers might be expected to spend their tax dividend by cutting prices, on the rationale that returns on new customer acquisition are now higher on a fully-taxed basis. Over time, this is, indeed, a likely scenario. In the short to medium term, however, one would assume simply that returns will rise.”