AT&T Gives Longtime Shareholders a Triple Gut Thrush

It’s been almost two months already AT&T (NYSE:t) announced that it was shutting down WarnerMedia and merging with Discovery (NASDAQ:DISC, NASDAQ:DISC), the owners of networks like HGTV and the Food Network.

Image of the AT&T (T) logo on a gray shop window

Source: Jonathan Weiss/Shutterstock

in the middle of the press release, it justified its dividend cut, which will cut its quarterly payment in half once the transaction closes in mid-2022.

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“Attractive dividend – adjusted to take into account WarnerMedia’s distribution to AT&T shareholders. Upon closing and subject to approval by AT&T’s Board of Directors, AT&T expects an annual dividend payout ratio of 40% to 43% on an expected free cash flow of more than $20 billion,” AT&T’s press release said on May 17.

So not only does the company want to annoy its longtime shareholders by halving its dividend, it justifies the move by suggesting that the shares issued in the merged entity offset the cut.

Really.

Let’s look at this assumption. I’m sure you’ll agree that AT&T is doing its best to annoy its loyal shareholders, not once, not twice, but three times.

This is why.

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In 2020, AT&T paid nearly $15 billion in dividends. That is based on weighted average outstanding shares of 7.18 billion and $2.08 in annualized payments.

At the high end of its future dividend payout ratio of 43%, it will pay $8.6 billion in dividend payments once the merger closes. So that’s a 43% cut or $6.4 billion. Currently it yields 7.4%. Based on a current share price of $28.18 and an annualized dividend payout of $1.19, it will return 4.2%.

AT&T Chief Financial Officer Pascal Desroches updated AT&T shareholders mid-June. He was very enthusiastic about the new dividend payment.

“[T]The company expects to reinstate the current dividend only after the proposed WarnerMedia-Discovery transaction is approved and closed. However, upon closing of the transaction, he expects the adjusted dividend to continue to deliver a very attractive return in the 95th percentile of dividend-paying stocks,” the company’s June 15 press release said.

So essentially he’s saying income investors should be happy with the new and improved payout. That’s like a restaurant known for the highest quality steaks turning its meat offering into hamburger. You will like it because we say so.

Total junk.

AT&T’s Chief Executive Officer, John Stankey, basically: defended its high dividend yield in March and April. Now to boast that it will still be the cream of the crop when it comes to stocks paying dividends is, as Jim Cramer portrayed it, an insult to its longtime shareholders.

The so-called Newco offset

As you know, AT&T shareholders will own 71% of the merged media entity, while Discovery shareholders will own the rest. The estimated enterprise value of the new company is approximately $130 billion.

So, based on $130 billion, $58 billion the fault of both companies is [pg. 5 of its merger presentation], suggests AT&T’s equity is worth about $51 billion [$130B less $58B *71%]. Based on 7.18 billion shares of AT&T outstanding, each new share is worth approximately $7.10 to AT&T shareholders.

AT&T’s shareholder declares 89 cents in annual dividends. That’s about an eight-year lower dividend to match what it gets from the spin-off.

When you consider that AT&T paid? $79.4 billion for Time Warner’s equity — it paid $42.1 billion in cash and issued 1.13 billion shares — and assumed that $23.3 billion in net debt for an enterprise value of $102.7 billion.

Here are some considerations about T shares:

What I’m focusing on is that it paid $79.4 billion for Time Warner’s equity. So once the Discovery merger is complete, AT&T shareholders will own $51 billion in shares of the new company.

From where I sit, Discovery currently has a market cap of $14 billion. Based on 29% of $72 billion in equity [$130 billion EV less $58 billion in debt], Discovery shares get a 50% increase in the value of their equity.

However, I haven’t been able to determine how much of the $43 billion that AT&T should receive from WarnerMedia is actually cash and not debt securities and the assumption of debt.

We are confident that the new company will have $58 billion in debt. What the 71% ownership stake is ultimately worth is to be determined at a future date.

I’ve seen all sorts of estimates from online experts. For example, I know that the equity AT&T spent on Time Warner in 2018 is higher than what the equity in WarnerMedia is worth today.

That could change.

However, if you’re an AT&T shareholder, I wouldn’t believe the company’s argument after this deal. If WarnerMedia were that valuable to the company, it wouldn’t twist it.

Bottom Line on T Stock

So if you want to hold onto your stocks in the hope of 2-1>1, you’re kidding yourself. AT&T has given shareholders a triple blow to the stomach.

First, it pays too much for WarnerMedia force thousands of employees are laid off. Then it comes with an alleged face-saving spin-off that takes away half of the shareholders’ beloved dividend. Finally, it tries to sell shareholders on the fact that they get two valuable shares worth significantly more than $28.

That’s pure poppycock, and T-share owners know it.

At the date of publication, Will Ashworth had no (direct or indirect) positions in the securities referred to in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publication Guidelines.

Will Ashworth has been writing about investments full-time since 2008. Publications in which he appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the US and Canada. He especially enjoys creating model portfolios that will stand the test of time. He lives in Halifax, Nova Scotia. At the time of writing, Will Ashworth held no position in any of the above securities.

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