Dividend Uncertainty May Mean Opportunity With AT&T Stock

As a media and telecom conglomerate, AT&T (NYSE:T) has many moving parts. But when it comes to T stock, there’s one thing that’s been top of mind among investors. That would be the future of its dividend.

AT&T (T) logo on wooden background
Source: Lester Balajadia / Shutterstock.com

At today’s prices, it has a forward dividend yield of 8.58%. In today’s low interest rate environment, that’s remarkably high. However, there’s a reason why the market has priced AT&T in a way that gives it this super high-yield.

After its planned divestiture of its media unit (WarnerMedia), “Ma Bell,” its moniker from another time, plans to cut its payout, in order to have more cash available to pay down debt, and improve the performance of its core telecom business.

Investors have been long aware of the pending dividend cut. Even so, it continues to weigh down shares, as many still see the stock as an income play only. Not as a vehicle for capital appreciation. For investors more interested in capital growth than dividend, though, this may work in your favor. With big upside if its restructuring is a success, investors who buy today may see big returns down the road.

The Latest With T Stock

As has been the case since last year, AT&T’s restructuring plans continue to be the main driver for shares. Since May of last year, when it announced its plans to separate its media business from its telecom business, the stock has performed poorly. During this timeframe, it’s fallen from over $30 per share, down to around $24 per share.

A few weeks back, it may have appeared that T stock had finally bottomed out. Perhaps due to commentary pointing out its merits as a deep value stock, it made a short-lived trip back to the high-$20s per share. But just a few days back, a remark from CEO John Stankey, in an interview with CNBC, was received poorly.

When discussing the upcoming divestiture of WarnerMedia, which entails merging it with another publicly-traded media conglomerate, Stankey hinted that he may prefer spinning off the resultant shares as a dividend, rather than distribute them via a split-off transaction. Investors are concerned about it opting to spin-off rather than split off the media shares.

What’s the difference? Again, it all comes down to the dividend. Splitting off the shares will reduce the share count. This, of course, will minimize the impact of the dividend cut. Spinning off, on the other hand, will keep the share count constant. With its annual payout dropping from $15 billion to $8 billion, a nearly 47% haircut to the 52 cents per share it pays out each quarter.

AT&T as a Turnaround Play

More often than not, turnaround plays fail to pan out. That’s why a lot of turnaround plays trade at deeply discounted valuations. There’s big upside if it pans out, but a lot of the time they don’t..

With this, you may think that the same fate awaits this company, when it comes to its own restructuring/turnaround efforts. Then again, this may be one of the promising turnaround situations. First, let’s assume that the media unit is spun-off rather than split-off. Investors buying shares today hence receive shares in the forthcoming spin-off, plus retain their position in T stock.

Shares in the company that WarnerMedia is merging with may have big upside potential. At least, according to Bank of America (NYSE:BAC) analyst Jessica Reif Ehrlich. Per her argument, merging Warner into that other entity could create what she calls “a global media powerhouse.” Between cost savings from consolidating the two companies, plus synergies from owning both its existing streaming platforms, plus WarnerMedia’s HBO Max platform, the merged entity’s shares could rise by more than 100%.

As for its core unit? With more bandwidth (pun intended) after it’s no longer also in the media business, management will be better-positioned to improve the telecom segment’s operating results. Add in tailwinds from this year’s 5G rollout, and in time, AT&T could deliver stronger numbers, which could outweigh the negative reaction to its reduced dividend payout.

The Verdict on T Stock

T stock currently earns a “C” rating in my Portfolio Grader. In the near-term, it could continue to trade sideways, due to the aforementioned dividend uncertainty. Also, while both segments have the possibility of turning around, it’s not set in stone.

Shares in the either split-off or spun-off media segment could struggle. The merger may wind up failing to create a “powerhouse” that can take on both its big media rivals, as well as big tech giants moving into the space. The telecom unit could see lower-than-expected benefits from the 5G rollout. This could limit its rebound potential, after the dividend cut.

Nevertheless, if you’re looking for more of a value play with big upside potential, you may want to give T stock a closer look.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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