I have written several articles about AT&T (NYSE:T) and its proposed dividend cut. Suffice it to say that once the company spins off its Warner Media division and combines it with Discovery Inc (NASDAQ:DISCA), the dividend will be cut. That should occur sometime in 2022. For now, though, we can estimate where T stock will end up.
This is because we can now derive a value for the new company, Warner Bros. Discovery (WBD) stock (as it will be named). And, using that value, we can estimate what the new dividend yield will be for T stock.
Finding the New Dividend Yield for T Stock
Right now, AT&T has a very high dividend yield. At $24.99 per share, and given its annual $2.08 dividend payment (paid quarterly), the yield is 8.32%.
Obviously, this yield is not going to last. Stocks with this kind of high yield imply that a dividend cut is going to happen. In this case, AT&T has already said that it plans on cutting the dividend after the WBD spin-off occurs.
Here is what is going to happen. On May 17, AT&T agreed to combine its Warner Media division with Discovery, Inc. as a separate public company. AT&T shareholders will own 71% of the company (29% to Discovery).
In addition, AT&T said that its new payout ratio (i.e., dividend payment divided by earnings) will be in the “40% – 43%” range. And this is based on “anticipated free cash flow of $20 billion plus.”
That implies that there will be $8 billion to $8.6 billion in dividend payments. On Oct. 29, 2021, there were 7,141 million common shares outstanding, according to its latest 10-Q. Therefore, the dividend payment will be between $1.12 to $1.204 per share (i.e., $8 billion/7.141 billion shares, and $8.6 billion/7.141 billion).
In reality, the payment will likely be closer to $1.15 since there are likely to be more shares outstanding by the time of the spinoff. In turn, this will be a dividend cut from $2.08 to $1.15 — 93 cents lower or a 44.7% drop.
That implies that the new dividend yield will be $1.15/$24.99, or 4.6%. But this is incorrect, and here is why.
Calculating The New Dividend Yield
Moreover, don’t forget the spin-off of the WBD stock will automatically reduce the T stock price. With that in mind, here is what actually happens. The company will declare and ex-date for the spin-off. On that date, the value of T stock will be “marked down” by market makers by the amount of the value of spin-off. This is the dollar amount in AT&T stock price that Warner Media will represent since those assets will be put into WBD stock.
I believe that we can now estimate what that value is right now, even though the company has not yet released any details of the spin-off. This is because we know that Discovery stock presently reflects the value of its participation as a 29% owner of the future combined WBD company.
Therefore, if we divide Discovery’s market capitalization by 29% we can derive the total value of WBD. For example, according to Yahoo! Finance, the total market value for all the classes of Discovery shares is $13.892 billion.
Next, if we divide this by 29%, the result is $47.9 billion. That is the implied value for WBD stock. For example, Discovery shareholders’ future 29% stake in WBD’s $47.9 billion is equal to $13.63 billion, which just under its present market cap.
In addition, AT&T shareholders will own 71% of this $47.9 billion valuation for WBD. Therefore, their stake is worth $34 billion. If we divide this by the 7.141 billion shares outstanding at AT&T, the price per share for AT&T’s stake in WBD is $4.76.
That is the number we are looking for. If we subtract $4.76 from AT&T’s price today of $24.99, we get a net new price of $20.23, post the spin-off. This is the price we can use to determine the new dividend yield.
For example, $1.15 divided by $20.23 equals 5.68%. The new implied dividend yield is 5.68% at today’s price for T stock.
What To Do With T Stock
The question remains then whether $20.23 is still too high. For example, with a 6% dividend yield, the stock has to trade at $19.17 per share. If we add $4.76 to that price, this implies that T stock should be at $23.93 per share.
That implies that T stock could fall another $1.12 or 4.5% to $23.87 if the post-split dividend yield will be at 6%.
But don’t forget this is just an estimate. We don’t know exactly what the new dividend payment will be. For example, if the dividend is reset at $1.18, then today’s price implies a new post-split yield of 5.62% (i.e., $1.18 / $20.99). That is fairly close to 6% and may imply that T stock is actually near a trough.
Until the company begins to clarify some of these issues, the market will not know exactly where to price T stock. However, all indications are that it is getting close to a trough, assuming that the new yield will be close to 6%.
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.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
