AT&T shares plummet on 40% -43% dividend cut

AT&T shares fell 5.8% on Tuesday, following a 3% drop on Monday, as investors reacted to the company’s announcement of a 40% -43% cut in its dividend payout ratio.

AT&T (T) shares fell 5.8% on Tuesday, posting the largest one-day decline since June 11, 2020, when the stock fell 6.1%.

On Monday, AT&T shares first rose, then fell in the second half of the trading session.

The initial growth was driven by positive views on a future merger between AT&T’s media division WarnerMedia and Discovery (DISCA) into a separate stand-alone company that could become a strong competitor to Netflix (NFLX) and Disney + (DIS).

Most market experts welcomed this move by AT&T, as trends suggest that in the world of streaming video, only the strong will win. Combining HBO Max with Discovery + and their synergy with WarnerMedia film studio should deliver better results when the companies work together.

Under the terms of the agreement, AT&T will receive $ 43 billion, which will allow the company to reduce its debt burden of a giant $ 180 billion as of March 31, 2021. AT&T shareholders will receive 71% of the shares of the new company. The deal is expected to close in mid-2022.

Analysts have long urged AT&T to focus on investing in its core cellular and internet business – developing its 5G networks and investing in fiber-optic broadband.

AT&T expects its 5G C-band network to reach 200 million people in the US by the end of 2023, according to a press release. By the end of 2025, the company plans to expand its fiber optic coverage to reach 30 million access points. ”

At the same time, AT&T indicated that after the closing of the deal, the size of its dividend will be “changed to reflect the distribution of WarnerMedia among AT&T shareholders.”

Following the close of the deal, AT&T expects the annual dividend payout ratio to be between 40% and 43% of its expected free cash flow of $ 20 billion. Share buybacks will be reduced by 2.5 times. As a result, AT&T will pay approximately $ 8 billion in dividends per year, up from the $ 15 billion the company paid in 2020.

AT&T Chief Financial Officer Pascal Desroches said the company “will continue to have a really healthy dividend.”

Investors did not like the prospect of a dividend cut by almost half, however, given that AT&T has long been known as the company that pays some of the highest dividends.

At current prices, AT&T shares have the highest dividend yield among other components of the S&P 500. wrote about this in the article “Seven Companies with the Best Dividend Yields to Date”.

Market analysts’ opinion

Raymond James analyst Frank Louthan confirmed that this “clear negative” from investors on the news of AT & T’s dividend cut stems from the company moving away from its earlier pledges to maintain a dividend gold standard as a sacred value proposition for shareholders. “

“This is a turnaround from a strategy of maintaining or increasing dividends at any cost,” Louthan wrote.

At the same time, the analyst noted that compensation for the reduction will be the receipt by AT&T shareholders of a stake in the combined WarnerMedia – Discovery, which will create a “new company for a better long-term growth profile.”

Truist Securities analyst Greg Miller called the dividend cut “clearly a negative development,” but he considered it “probably necessary to avoid much worse conditions going forward.”

William Blair analyst Jim Brin, in turn, believes that the huge investments and huge debt over the past few years “have limited the ability of AT&T to operate efficiently.”

“Once the deal is closed, AT&T’s dividend yield will be in line with Verizon at around 4.5%, which makes sense given that the two companies will now look the same from a business perspective,” Brin said.

The deal will give AT&T a stronger financial footing and more flexibility to invest in 5G, Brin said.

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