AT&T (NYSE:T) plans on spinning off its WarnerMedia division very soon into a new company called Warner Bros. Discovery, which will likely have the symbol WBD. As a result, T stock looks like it could be good value now, based on where the new price of WBD will be. I will attempt to estimate its value in this article.
Based on the earnings call on Feb. 24 from Discovery Inc. (NASDAQ:DISCA, DISCB, DISCK), the spinoff event will occur sometime in early Q2. That is what the Discovery President and CEO, David Zaslav, told investors on the Feb. 24 earnings call.
This will be after a shareholder meeting, scheduled for Mar. 11, takes place. It will be convened to approve the merger with WarnerMedia, the division that will be spun off from AT&T.
Where Things Stand With Warner Bros. Discovery
In addition, Zaslov affirmed to investors, in answer to a question, that the new company WBD is on track to make $14 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization). WBD is also set to generate free cash flow (FCF) of $8 billion in 2023.
Therefore, we can now estimate what the value of the spin-off will be to AT&T shareholders. We can use the following three facts and then manipulate them to come up with a valuation:
- AT&T shareholders will receive 0.24 shares of WBD for every share they own in AT&T. This is based on the Feb. 1, 2022, announcement from AT&T.
- AT&T shareholders will own 71% of the combined shareholding of WBD. This was also in the Feb. 1 release to AT&T shareholders.
- AT&T has roughly 7.143 billion shares outstanding as of Feb. 11, according to page one of its 10-K filing on Feb. 16, 2022.
In addition, let’s estimate that the value of WBD in the market will work out to $160 billion or 20 times FCF of $8 billion estimated for 2023. That number can change and it will affect the value of the spin-off. But we have to start somewhere.
How the Spin-Off Will Affect T Stock
So, here is how the math works out. First, let’s figure out how many shares in WBD there will be. We know that 0.24 shares will be created and given to AT&T shareholders for every share in AT&T they own. That means that there will be 0.24 x 7.1428 billion shares of WBD provided to AT&T owners, or 1.714272 billion shares of WBD.
Next, we know that AT&T shareholders will own 71% of the total number of WBD shares outstanding. Therefore, there will be 2.414467 billion shares outstanding of WBD (i.e., 1.714272b/0.71=2.414468b).
Lastly, since we estimated that the value of WBD will be $160 billion, the price per share will work out to $160b/2.414468b shares, or $66.27 per share.
So now we estimate that the price of WBD will coalesce around $66.27 per share. Therefore AT&T shareholders will own 71% of those shares or $47.057 of the $66.27 price.
As a result, if we divide $47.057 by the total AT&T shares (7.14272 b), the value of the spin-off is $6.59 per AT&T share. This is important since that is the amount that T stock will fall.
So, on the spin-off date, we might expect that the price of AT&T will fall from $23.91, where it was Feb. 25 by $6.59 per share to $17.32 per share.
Remember, this is just an estimate. But it is important since we can then see that the dividend yield will be very attractive. For example, AT&T has said that the new dividend per share (DPS) will be $1.11 on an annual basis.
So, if we divide the $1.11 DPS by $17.32 per share (the new pro-forma spin-off price of T stock), the dividend yield will be 6.41%. This is a very attractive dividend yield.
What to Do With T Stock
The single most important thing you should do is DO NOT sell your WBD shares. These will be quite valuable over time. They may even eventually pay a dividend. That could make up for the lost dividends from T stock.
Second, it seems clear that a 6.41% dividend yield is too high for T stock. As I pointed out in my last article, Seeking Alpha reports that the average yield in the last five years on cost has been 4.97%. In other words, eventually, AT&T stock will rise to that level where it has a 4.97% yield.
This implies that the price will rise to $1.11/0.0497 or $22.33 per share. Using Feb. 25’s valuation (after adding back the spin-off value of $6.59 pre the spin-off), it is equivalent to $28.92. That is about 21% over Feb. 25’s price of $23.91.
So, hold on to your spin-off shares and your T stock shares. They will both be worth much more than it appears today.
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.