There’s bad news for income investors: AT&T’s 52-cent-a-share dividend would be cut if its sale of WarnerMedia to Discovery goes through.
Still, AT&T (ticker: T) investors initially applauded the deal, announced Monday morning, as it would help the telecom company focus on its core and reduce its high debt burden. The stock was at $33 and change at around 11 a.m., up about 3% on the session. It currently yields 6.2%.
The stock, which has lagged behind the broader market in recent years, has long been a popular option for equity income investors. It has a five-year annual return of about 2.5%, versus 17.6% for the S&P 500, according to FactSet.
But the dividend’s health had been in question given a debt load that was exacerbated by the company’s 2018 acquisition of the WarnerMedia assets, which include TNT, CNN, HBO, and the Warner Bros. movie studio. As of March 31, long-term debt totaled about $160.7 billion, up from $153.8 billion at the end of 2020.
In an interview with CNBC Monday morning, AT&T CEO John Stankey said “there’s been some overhang on our equity that’s been driven by the balance sheet dynamic,” notably debt. The deal will allow AT&T to “accelerate our deleveraging of the business,” he added.
Under the deal with Discovery (DISCA), AT&T shareholders would own 71% of the new company—potentially capturing some upside there if the combination works as billed.
Stankey told CNBC that the company is giving the shareholders an interest in a fast-growing media company and that AT&T is “continuing to maintain a very, very hearty and healthy dividend.”
In April, AT&T said it was aiming for a dividend payout ratio in the “high 50% range.” But with the WarnerMedia assets jettisoned, it needs to resize, or cut, the dividend.
In a news release Monday, AT&T said it expects an “annual dividend payout ratio of 40% to 43% of anticipated free cash flow of $20 billion plus.”
Simon Flannery of Morgan Stanley observed in a research note Monday that, “If we assume an $8 [billion] payout, this would be a nearly 50% reduction from current levels of some $15 [billion] and would put the stock on a low 4%” yield and that stock “buybacks could also be a possibility down the road.”
Bottom line: It’s still a cut.
And that could put its status as a member of the S&P 500 Dividend Aristocrats, a group of stocks that have paid out higher dividends for at least 25 straight years, in peril. AT&T’s last increase, by a penny, was declared in late 2019.
The stock’s status in that group will be reviewed, according to Howard Silverblatt of S&P Dow Jones Indices.