While the AT&T (NYSE: T ) merger with Time Warner is now a done deal, despite Trumpian opposition, investors have been voting on it for some time. And they’re skeptical. With T stock trading at $30+, the yield on the $2.04 per share dividend is currently a whopping 6.7%.

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That means a lot of people don’t believe T stock can afford that dividend. AT&T listed $167 billion in debt on its balance sheet at the end of 2018. That’s up from $127 billion at the end of the previous year. The difference is Time Warner.

Whether you buy T stock today depends on whether you believe that AT&T can cut the cost of running the business dramatically, starting this year, and increase free cash flow to cut its debts.

The Debt, The Debt, The Debt

Utilities are supposed to be capital hogs with big debt loads. AT&T expects capital spending this year to be $23 billion. That’s down from 2018. The money goes mainly into cellular upgrades. The 5G revolution will be expensive.

Assume AT&T is paying an average of 3.5% to service that debt. That’s $5.8 billion of earnings just for debt service. Now consider that it has 7.28 billion shares outstanding, and each share of T stock is getting the $2.04 dividend. That’s another $14.8 billion, a total of $20.9 billion in debt service and dividend costs.

Trouble is, the company’s net income for 2018 came to $19.93 billion. Operating cash flow in 2018 was $43.6 billion. But investing and financing more than ate that up. Total cash flow came to a negative $45 billion. AT&T’s pension is also underfunded, as Will Ashworth noted back in 2017.

How do you get free cash flow of $26 billion from this mess and reduce debt by $2 billion, which is the company’s target for 2019?

Tying the Content to the Line

AT&T predicated its debt-heavy purchase of Time Warner on the assumption it could squeeze more profit from the asset. AT&T would tie content like HBO and CNN to its service contracts and make its services “free” to subscribers. It can also not charge for bits used on its services while charging for bits used by competitors.

This is not working.

The current faster network speeds mean more bits are delivered for the same amount of money. At the same time, compression means it takes fewer bits to deliver the equivalent of a TV broadcast.

Consumers are thus free to watch what they want. They’re choosing not to watch AT&T’s DirecTv NOW streaming service. That service lost 267,000 customers in the fourth quarter, and the satellite service from which it descended lost another 403,000.

While losing subscribers in entertainment, however, Time Warner is also cutting costs. That has already cost AT&T the people who were running Time Warner’s key entertainment units, Richard Plepler and David Levy. The man now in charge of Time Warner media operations, John Stankey, is a phone guy — not someone with experience creating exclusive content people will pay for. AT&T now owns HBO, which is a huge asset in 2019 when you want to keep and gain subscribers, and AT&T stock investors are watching this resource get squandered.

Meanwhile, Disney is reportedly trying to buy AT&T’s 10% stake in Hulu. If the deal happened, it wouldn’t make much of a dent in T stock’s debt, but it would sever one of AT&T’s streaming arms.

The Bottom Line on T stock

There are people still pounding the table for AT&T. They insist the T stock dividend is safe.

I once bought their argument. I even bought AT&T common, based on that dividend. But if you’re buying yield while losing principal, you’re losing money. I sold and took the loss.

AT&T has a desperate need to increase profits, given the debt it incurred in the Time Warner purchase. But Time Warner is facing growing competition in entertainment from Amazon.Com (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), and other companies, which have driven up the cost of quality production as they seek to line up talent. Competitors also have the free cash flow to sustain these investments.

Add it all up and T stock is a yield trap.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.