In the last two weeks, AT&T (NYSE:T) provided an update to shareholders and also attended a Wells Fargo conference where it talked about the company. But in both situations, even though questions came up about the Warner Media spin-off deal, no updates were given. As a result, T stock has been struggling, as people are trying to figure out what is going on.
I have written several articles recently explaining clearly that the stock’s extraordinarily high dividend yield cannot last. The $2.08 annual dividend, if divided by the closing price on Dec. 2 of $23.05, equals 9.02%.
This is clearly unsustainable. Only stocks where investors expect to see a decline in the dividend soon ever trade with that high a yield.
Where This Leaves AT&T Stock
In the most recent update to shareholders, the CEO of AT&T Communications, Jeff McElfresh, gave no new information about the spin-off and the proposed dividend cut. Of course, he does not handle the corporate strategy, so he might not have been planning on doing this.
But even after he was directly asked about this, the CEO of AT&T Communications avoided any answer about the spinoff.
This is also typical of what the CEO of AT&T, John Stankey, did during the Oct. 21 Q3 earnings conference call. All that he would say is that the transaction is processing normally through the various regulatory agencies.
He said this: “Those processes are moving along at the pace we would’ve expected.” That’s all that shareholders have been told. He said nothing about the proposed dividend cut.
AT&T’s Expected Value
So as it stands now, all we know is that the new dividend will likely be about $1.15 per share. This is based on the calculations provided in my previous article on AT&T and its proposed dividend cut.
But since then, Discovery (NASDAQ:DISCA) stock has fallen a good deal. As of the close of Dec. 2, it is down to $23.25 per share and a market cap of $15.28 billion. As I explained in my prior articles, Discovery will own 29% of the spin-off company, to be named Warner Bros. Discovery (WBD). Therefore, the implied value of WBD will be $15.28 billion/0.29, or $52.7 billion.
That implies that AT&T shareholders’ 71% stake in the spin-off of WBD will be worth $37.4 billion (0.71 x $52.7 billion). Now, as there are there were 7.141 billion common shares outstanding, according to its latest 10-Q, this makes the spin-off of WBD worth $5.24 per share.
So, if we subtract $5.24 per share from $23.05 per share, the new valuation will be $17.81 per share. That is because the day the spinoff occurs, T stock will be marked down by the amount of the spinoff shares for AT&T shareholders.
Therefore, the new see-through dividend yield will be 6.46%. This is because if we divide $1.15 by $17.81 per share the pro format yield is 6.46%. This is also close to the 6.51% average yield that AT&T stock has had in the last four years.
What To Do With T Stock Now
So, you can see that mathematically, with AT&T’s see-through yield of about 6.5% it is at a point where investors can believe it has value.
But keep one thing in mind. We do not have any real details yet from AT&T. We don’t even know what the new dividend per share will be. One thing is for sure — management from AT&T is saying nothing, even though their stock price keeps falling.
You would think they would at least give an update that could help the stock recuperate or just give more concrete details about the value of the spin-off. Apparently, they can’t. So don’t expect T stock to rebound until there is more certainty along these lines.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.