AT&T (AT&T Stock Quote, Chart, News, Analysts, Financials NYSE:T) shareholders may ultimately see upside from the proposed Discovery merger and spinoff deal but for those investors holding onto AT&T for its hefty dividend, the disappointment could be too much, says Baskin Wealth Management president David Baskin.
“The AT&T dividend which was something on the order of seven and a half percent is probably going to be cut in half,” said Baskin, speaking on BNN Bloomberg on Friday. “So, there’s an argument abroad that AT&T will stop being a yield stock and start being some sort of hybrid of yield and growth as a result of this transaction.”
“But certainly for those people who bought it only for the dividend, I guess this transaction’s a bit disappointment,” he said.
In a bid to compete with streaming giants like Netflix and Disney, AT&T announced last month a plans to combine its content business WarnerMedia, bought just three years ago for $85 million, with Discover. Under the terms of the deal, AT&T shareholders would get stock representing 71 per cent of the new company (to be called Warner Bros. Discovery) while Discovery shareholders would receive stock amounting to 29 per cent. For the merger, AT&T would also receive $43 billion in cash, debt securities, and WarnerMedia’s retention of certain debt.
Not so long ago, AT&T was promoting the idea that combining content producer Time Warner with AT&T’s telco distribution capabilities would make for a global powerhouse, but the claim now seems to be that hiving off Warner Media and creating two independent companies will make for capital structure improvement on AT&T’s side and “sharpen the investment focus” by focusing interest on either media or telecommunications.
“For AT&T and its shareholders, this transaction provides an opportunity to unlock value in its media assets and to better position the media business to take advantage of the attractive DTC trends in the industry. Additionally, the transaction allows the company to better capitalize on the longer-term demand for connectivity,” said AT&T in a press release.
But Baskin seems less convinced that the reworked appearance will make for a stronger AT&T.
“Everybody recognizes that [AT&T] is a lumbering old giant with slower growth prospects and a lot of debt. So, I think they’ve done this transaction in an attempt to change the perception of the company to something with some more growth characteristics,” Baskin said.
Discovery’s share price, which showed little movement as a result of the merger announcement last month, has nonetheless been on a wild ride over the past year and a half, as investor interest in the still-growing streaming content provider space seemingly aided the stock’s rise from about $25 at the start of 2020 to as high as $77 by March of this year.
But the wheels fell off and the stock sank to about $40 by late March and Discovery has been sinking further in the ensuing months. For comparison, Viacom CBS, which is also in the streaming space, had a rise and fall that was virtually the spitting image of Discovery’s.
For AT&T, its stock had been on a bit of an upturn in March through to May before news broke of the proposed merger and spinoff, which promptly dropped the stock about ten per cent.
The prospect of a hobbled dividend being called one of the culprits. Where investors had been enjoying AT&T’s devotion to raising dividends over the past 36 years, indications are that the post-spinoff version of AT&T will sport a dividend yield about three or four percentage points lower than the current above-seven-per-cent yield. AT&T said in the merger announcement that its dividend would be resized “to account for the distribution of WarnerMedia to AT&T shareholders,” and that the annual dividend payout ratio of 40 to 43 per cent. Last year, the company’s payout ratio was 55 per cent, while before the Discovery announcement AT&T was projecting a payout ratio in 2021 in the high-50-per-cent range.
That proposed drop in yield has drawn sharp criticism, since AT&T had earlier this year assured shareholders on the strength and safety of its dividend program.
“The way [management] did it was completely suboptimal, and the people who are selling [AT&T] are the long-term holders who feel very betrayed,” said CNBC’s Jim Cramer on the channel’s Squawk Box in mid-May.
Cramer has derided the company’s position that the long-term interests of shareholders will be served by the merger and spin-out while also saying AT&T’s purchase of Time Warner was itself ill-advised.
“I mean, why not just say, ‘We screwed up’? Why not just say, ‘We paid too much’? Why not just say, ‘We said that the dividend was safe, and we were wrong’?” Cramer said.