AT&T Inc. shares are headed for their worst single-day performance in almost a year as investors continue to digest the company’s decision to reshape its business yet again with a spinoff of WarnerMedia to Discovery Inc.
The move will allow AT&T
to refocus on its core telecommunications strengths—wireless and fiber—but the company is making other changes as well. Notably, the company disclosed that it would be “resizing” its dividend after the $43 billion deal closes as AT&T will seek to target a 40%-to-43% payout ratio on upward of $20 billion in free-cash flow.
Shares are off 5.8% in Tuesday afternoon trading and on pace for their biggest single-day percentage decline since June 11, 2020, when the shares dropped 6.1%. Though AT&T’s shares were up as much as 5.1% intraday Monday after the WarnerMedia deal was announced, they ultimately closed Monday’s session down 2.7%.
Chief Financial Officer Pascal Desroches said on an investor conference call Monday morning that AT&T is focused on “where can we deliver the most attractive returns to our shareholders” as the company thinks “investing additionally in our businesses is paramount.” He expects that the company is still “going to have a really healthy dividend” with a yield that would put it in the 95th percentile of dividend payers.
The dividend announcement was a “clear negative,” Raymond James analyst Frank Louthan IV wrote in a Monday afternoon note to clients. The company’s target implies a roughly 45% reduction in AT&T’s dividend relative to current levels, by his math.
“This deviates from previous commentary in which we viewed management as the ‘gold standard’ in maintaining the dividend as a sacrosanct tenet of its value proposition to shareholders,” Louthan wrote. “This about-face from the strategy, which was to maintain or grow the dividend at all costs, will likely linger in investors’ minds for many years.”
Louthan, who is bullish on AT&T’s stock with an outperform rating, noted that shareholders would at least be likely to see four more dividend payments at current levels since AT&T doesn’t expect the WarnerMedia deal to close until mid-2022.
At current prices, AT&T’s stock has the highest dividend yield among components of the S&P 500 index
AT&T shareholders will also get a stake in the combined company formed by WarnerMedia and Discovery
“so at least there is some compensation for the cut and the spinoff sets up the new company for a better long-term growth profile,” he wrote.
Truist Securities analyst Greg Miller referred to the dividend “reset” as “clearly a negative event” but one that he deemed “likely necessary to avoid far worse conditions at a later date.”
“Although the company reiterated the fact that it would be in the 95th percentile of all dividend payers with a ~4% yield (~7% prior to announced cut), when pairing this reduction with the anticipated tax rate hikes and increasing capital expenditures, we believe the payout ratio could be increasingly pressured after already dropping from our estimate of ~63% in 2022,” Miller continued in a Monday note to clients.
He has a hold rating and $30 price target on AT&T’s shares.
William Blair analyst Jim Breen called the dividend cut “somewhat surprising given the income focus of some shareholders.”
“However, we note, post-close, AT&T’s dividend yield will be in line with Verizon
…at around 4.5%, which makes sense given the companies will now look similar from a business perspective,” he wrote in a Tuesday note to clients. “We believe AT&T became too broad in focus over the last few years, which restricted its ability to run efficiently.”
In Breen’s view, the deal will put AT&T on healthier financial footing, giving the company more flexibility to invest in its 5G buildout. He has a market perform rating on the shares.