AT&T (NYSE:T) has a very high dividend yield. As of Nov. 26, it stood at 8.58% given its $2.08 dividend and its price of $24.22. However, T stock won’t continue to have this high yield once the spinoff of Warner Media and its merger with Discovery (NASDAQ:DISCA) occurs.
I have written several articles about this in the past explaining why the dividend yield will fall. In my last article, when AT&T was at $24.99, I argued that T stock was close to a bottom.
One reason for this is that after the merger/spin-off occurs, AT&T will cut the dividend payment. I estimated at the time that the new dividend would be about $1.15. I also wrote that AT&T would likely fall by about $4.76. This would be the value of the spinoff shares.
At Nov. 26’s price of $24.22 that would lower T stock to $19.46. Therefore, with a new $1.15 dividend, the yield would be 5.9%. This is significantly lower than Nov. 26’s yield of 8.58%.
However, we need to adjust this, based on the methodology I used in the last article. For example, at the time Discovery had a market valuation of $13.892 billion. I used this to derive the $4.72 price for AT&T shareholders’ combined stake in the Warner Media/Discovery spinoff/merger company.
But now Discovery is down from the last article. Its new market capitalization as of Nov. 26, according to Yahoo! Finance, is $12.348 billion.
That is 11.1% lower than the previous valuation. So we can assume that the market believes that the value of the spinoff company is worth 11.1% less than before. This lowers the per-share value of AT&T shareholders’ stake down to $4.20 per share.
Therefore, the post-spinoff value for T stock will be $20.02 (i.e., $24.22 – $4.20). So, its new expected dividend yield will be 5.74%, not 8.58%. That is also a lower yield than I previously estimated at 5.90%.
The question remains whether the 5.74% yield will hold. I don’t think it will. Based on the company’s history in the last four years, the dividend yield has averaged 6.49%, according to Seeking Alpha.
So if we divide the $1.15 dividend forecast post-merger by 6.49% we get a new target price of $17.72 per share. Next, after adding back the $4.20 in value from the spin-off, we get an equivalent price of $21.92 per share.
Where This Leaves T Stock
That implies that AT&T stock could fall down further from $24.22 to $21.92. This assumes that the yield falls from 8.58% before the spinoff to a post-spinoff yield of 6.49%.
But, even if the stock falls to a 6.0% yield, the price could fall to $23.37 per share. This is because if we divide $1.15 by 6.0%, the post-spinoff price will be $19.17, and the implied pre-spinoff price value is $4.20 higher, or $23.37.
This still implies that T stock could fall from $24.22 to $23.37, or 3.5% lower than Nov 26’s price. That shows that I might have been a little early in my previous article when I said it might be near a bottom.
It depends on what the appropriate lower dividend yield will be. The market will lower the AT&T yield after it spins off Warner Media, merges it with Discovery, and then cuts the dividend payment.
This will likely depend on how positive the market sees AT&T, as well as its spinoff after the merger deal goes through. So far, the market is dragging Discovery stock lower. That implies that the market is not so excited about the planned merger with Warner Media. That is scheduled to happen sometime in 2022.
So T stock is likely to move 3.5% lower from Nov. 26’s numbers if the market wants to give it a 6.0% dividend yield after the spinoff. That does not make it a buy anytime soon.
On the date of publication, Mark R. Hake did not (either directly or indirectly) own any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.