So a lot of things are happening with AT&T right now. Last year, we saw the company struggle to outpace the market. Most companies fell hard because of the pandemic starting March 2020 and was able to perform back towards the end of 2020, but AT&T continued to perform sideways throughout that year.
Earlier this year, AT&T has announced plans to spin-off it’s TV business into a separate company in a deal with TPG. And now, we got news of AT&T spinning off WarnerMedia into a new company alongside Discovery.
If you don’t know what WarnerMedia is, it’s basically Time Warner Media, which AT&T bought in 2018 for a whopping $85 billion. This media and entertainment company houses some of the biggest names you know: HBO Max, HBO, Cartoon Network, DC Entertainment, CNN, and, one that I love, Crunchyroll.
So under this deal, AT&T will take $43 billion in cash and securities in exchange for its WarnerMedia division, which will retain some debt. AT&T shareholders will have a 71% stake in the new company and Discovery shareholders will have 29%.
This new company will be headed by the current President and CEO of Discovery, David Zaslav. And this deal is expected to close mid-2022 or Q2 of 2022.
The decision to spinoff WarnerMedia stems from, what I know, the declining strength of AT&T to cover all of its fronts. They’re heavily in debt and financially thinned out trying to compete with other telecom giants and streaming services.
AT&T is saying that the transaction will “allow the company to better capitalize on the longer-term demand for connectivity.” They want to focus on their core business, which is communications and connectivity, which means more 5G rollouts and upgrades to their fiber coverage, which in today’s environment, they should not lag behind.
Because of this merger, AT&T has to “account for the distribution of WarnerMedia assets into the new company.” Therefore, its dividend payouts will be “re-sized.” In simpler terms, they’re going to cut the dividends to accommodate the transfer of assets.
The remaining AT&T assets will aim to give shareholders a dividend payout ratio of between 40% and 43%, the company said, based on anticipated free cash flow of around $20 billion.
So for any AT&T shareholders out there, you can expect to have lower dividends from your holdings. Based on some calculations I found online, the new AT&T will yield an annual dividend of around $1.16 per share which equates to a dividend yield of around 4.86%, and it could even be lower. This translates to around 1$ and 2% reduction to its payout and yield, which is close to half what we have right now.
So what’s my plan with AT&T?
You’re most likely here because you’re a dividend investor just like me. And news like this can discourage you from continuing to support the stock you just bought, and that’s how I’m actually feeling about this. I feel disappointed and little betrayed as to what is happening to the company.
I bought in because the dividend yield looked promising at the high 6’s. I know that AT&T was in high waters due to their high debt load, but that didn’t matter since historically AT&T has been paying out their dividends consistently and raising it, making the company part of the Dividend Aristocrats. But with this cut, it will be out of that list!
I wasn’t too updated with AT&T, so on May 20th I bought 3 shares. And when I saw my news feed couple of hours later, I saw this news of the dividend cut. In my portfolio, I now 30 shares which right now is valued at around $900.
The price keeps fluctuating right now because investors are having thoughts as to where this is going. Some investors are hopeful because the CEO, John Stankey, recently purchased $1 million of AT&T shares and CFO, Pascal Desroches, paid $589,630 over May 19 and 20 for 19,976 AT&T shares.
A lot of investors right now have mixed feelings about this. There are those who have closed their entire AT&T positions, because why would they hold a stock that just cut their dividends? I mean, that’s the entire reason why they bought into AT&T anyway.
And there are those who are holding on to the stock because they’re seeing it as a long-term play now that AT&T has refocused their business into where they’re actually supposed to focus on. AT&T can now focus on the communications and connectivity business and pay off some of their debts with that $43 billion.
I fall into the second category. I’m planning on holding on to this stock because I’m going to think long term with the company. The refocus is good. Paying off debt is good. And while they cut their dividends, they’re still going to pay dividends but just a smaller amount than what I signed up for. And this wouldn’t come to effect until next year. With that said, I am not adding more to this position until I see better news, plans and results from this play by AT&T.