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The Call on AT&T

Sonja Haggert

HAVE YOU EVER HELD a stock for years and grown to love it? What if your research now says it might be time to break up?

Many years ago, I bought AT&T. It was the perfect stock for a dividend investor like me. It was a dividend aristocrat, meaning it had increased its dividend for at least 25 years. In fact, AT&T had been increasing its dividend for more than three decades.

But while the dividend was always generous, the stock price has long been stagnant. I didn’t care because I was reinvesting my dividends. The dividends bought more shares, thanks to the lower stock price. Those additional shares, in turn, generated more dividend income. It was a virtuous circle.

But today, a great deal has changed in AT&T’s story.

There’s new management. John Stankey, the new CEO, has made some significant moves. He’s turned his back on costly acquisitions like Warner Media and DirectTV. Those deals didn’t pan out and may have cost AT&T more than $50 billion, according to some estimates.

AT&T still has more than $150 billion in debt left from its buying spree. That has Wall Street worried, so Stankey is reversing course, selling portions of the acquired businesses to pay down debt. The expected infusion of roughly $50 billion will take a big chunk out of AT&T’s liabilities.

After the dust settles, current AT&T will be broken into three companies:

  • AT&T. The parent company will be refocused on its core telecom business.
  • DirectTV. Now a separate company, this will be co-owned by AT&T and private equity firm TPG Capital, which holds a 30% stake.
  • Warner Bros. Discovery. AT&T will spin off Warner Media, which will be combined with Discovery to form a new company. The merger is expected to close in mid-2022.

AT&T has indicated that it’ll no longer be increasing its dividend. In fact, a big cut is coming. AT&T plans to devote 40% to 43% of the company’s free cash flow to dividend payments. At that rate, analysts expect the dividend could be cut 44% from current levels.

On the plus side, AT&T shareholders will receive shares giving them 71% ownership of the new Warner Bros. Discovery. It’ll be run by David Zaslav, a knowledgeable media insider who’s been CEO of Discovery since 2007. He was previously involved with the launch of CNBC and MSNBC, so he brings a wealth of experience to the newly formed enterprise.

The new spinoff company looks to be strong. Warner Bros. Discovery will be the second-largest media firm by revenue, in the same league as industry giants Netflix and Disney. It could have a market cap above $60 billion, according to one estimate.

To cover all the bases, I decided to research analysts’ estimates. They were all positive for the future growth of the spinoff. This is has led to my current quandary: Should I stay or should I go?

Even though AT&T’s dividend yield will be reduced, the payout will still be healthy. Now that I’m retired, those dividends will provide me with income. What are my options? I see three choices:

  1. Wait and see. I could give AT&T’s restructuring time to shake out, while continuing to read evaluations.
  2. Sell some and keep some. This limits my downside, plus some of Ma Bell’s spinoffs have done quite well in the past.
  3. Sell it all and use my loss to offset capital gains. The stock is now below my purchase price.

I’ll consider these options and do what I always do: Draw up a list of advantages and disadvantages, and then take it from there.

Sonja Haggert is the author of Invest, Reinvest, Rest. You can learn more at SonjaHaggert.com. Follow her on Twitter @SonjaHaggert and check out her earlier articles.

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