We’re less than 5 days into 2021 and just as I suspected, we’re already seeing 5G trending in the news cycle.
Ericsson (NASDAQ: ERIC) has already announced new expansion globally and filed a patent infringement complaint against Samsung for four violations related to wireless device technology. But perhaps the most interesting story to follow is the most recent FCC spectrum auction.
Bidding resumed yesterday among the 57 potential bidders. Bids have surged past $76.5 billion, making it the most expensive auction in history, and not by a little. The last “biggest auction” was back in 2015 when companies spent $44.9 billion on AWS-3 bands.
That’s not necessarily surprising since these mid-band frequencies are crucial to the expansion of 5G technology. As of right now, current 5G network buildouts of the big three are all heavy on using low-band airwaves. In reality these current bands aren’t that much faster than existing 4G networks.
This range was fine for creating the foundation and initial expansion, but to achieve the speed and latency improvements, it’s time to grab the mid-band and high-band frequencies. And actually, it’s a race to catch up with T-Mobile (NASDAQ: TMUS).
T-Mobile is at the forefront of mid-band spectrum ownership due to its acquisition of Sprint last year. Plus, T-Mobile has a little help from stockholder Deutsche Telekom who threw in an additional $10 billion.
This is creating a frenzy among competitors. This includes Verizon Communications (NYSE: VZ), who analysts thought would be the leading bidder right out of the gate. Now analysts are predicting that Version will spend double or triple the $15 billion originally estimated.
Companies like Verizon and AT&T (NYSE: T) are hellbent on keeping up with T-Mobile and it’s expected we might see some real go-for-broke bidding on these key frequencies. These companies are even willing head to the debt market to foot the bill.
Building up this debt on the balance sheet could mean trouble in the future if it doesn’t result in at least catching up with T-Mobile.
Verizon currently pays its shareholders a dividend of 62.75 cents with a dividend payout ratio of around 60. Taking on debt means that future cash flows end up diverted to debt service and could put future dividend increases at risk.
In addition to the winning bids, the winners must also pay an estimated $13.2 billion in relocation costs and incentive payments to satellite operations. I don’t doubt we could easily see spending on these C-bands to hit $100 billion.
It also can’t be ignored that companies such as Comcast and Charter Communications are stepping up this round to increase their 5G bands.
The FCC is expected to unveil the winning bidders and I’ll be keeping a close eye on it. If companies are willing to potentially blow up their entire balance sheets to get these bands, then it’s worth watching.
But the one to avoid right now is Verizon.
Verizon’s dividend payout ratio at 60, which is already a high. The company’s outspoken aggressiveness to be the dominate 5G carrier in the U.S. could lead into a bidding war. What ever price they pay will add more debt into the future, jeopardizing the current yield.
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