On Feb. 1, 2022, AT&T (NYSE:T) finally announced details on the spin-off of its WarnerMedia subsidiary after its merger with Discovery, Inc. (NASDAQ:DISCA, NASDAQ:DISCK, NASDAQ:DISCB). The certainty will help alleviate pressure on T stock and allow analysts and investors to assess the value of the spin-off and the proposed dividend cut.
Prior to this, it was not 100% clear whether there would be a spin-off or a split-off of the Warner Bros Discovery (WBD). I talked about this in several previous articles.
In addition, we now know that the new dividend will be $1.11 per share. So, at today’s price of $24.56, T stock has a pre-spin-off pro forma dividend yield of 4.5%.
The Mechanics of the Spin-Off and Dividend Cut
However, given that the value of the spin-off could take $6 to $7 off of the post-spinoff price of AT&T, its final dividend will be closer to 6.0% to 6.3%.
Here is how the math of that works out. On the day of the spin-off, the price of AT&T will fall automatically. It has to fall since a good portion of the assets of the company “spin-off” into a new company, Warner Bros Discovery. In fact, AT&T shareholders will receive 71% of the total number of shares, and Discovery shareholders will receive 29%.
Therefore, assuming the value of the assets that leave AT&T are worth $6 to $7 (in terms of assets spun off from AT&T), the post-spin-off price of AT&T stock will be that much lower. So we take the price of AT&T now of $24.56 and subtract either $6 or $7 to estimate its post-spin-off settled price. That works out to $17.56 (i.e., $24.56-$7) or $18.56 (i.e., $24.56 – $6).
Therefore, the new dividend yield will be either 6.0% (i.e., $1.11/$18.56) or 6.3% (i.e., $1.11/$17.56).
Now, here is a fine point to understand. The new value of AT&T will only fall by the amount of the net assets that leave AT&T, not necessarily the new price of the WBD stock. This is where a lot of analytical confusion comes into play.
Where AT&T Stock Could Trade
Nevertheless, this 6%+ dividend yield is very close to where the T stock has been trading in the past six months to a year. For example, Seeking Alpha has a page showing that in the last four years the average dividend yield has been 6.65%. This is slightly higher a yield than now and implies that T stock could fall a bit from here.
However, the page also shows that AT&T has had an average 5% dividend yield over the past five years on cost. This means that the dividend is not used to buy more AT&T shares.
Therefore, we can assume that the dividend yield could actually fall to about 5.82% (the average of 6.64% and 5.0%) over the next several years. That implies, using the $1.11 dividend per share (DPS), that the post-merger/spin-off price will rise to $19.07 from my previous post-merger/spin-off price assumed of $17.56 (with a $7 per share spin-off value for the WarnerMedia assets).
In other words, the price could rise 8.6% or so from $17.56 (i.e., $24.56 today minus $7.00). That is not much.
What to Do With T Stock
In the Feb. 1 press release about the spin-off, AT&T made it clear that we don’t know the exact value of the spin-off. This is because we don’t yet know the final number of shares WBD will have. Since the deal is seen as closing (according to the press release) in Q2, 2022, the number of shares can’t be known up until right before the close.
As a result, we can’t predict exactly what will happen to AT&T stock. We just know it will fall, but we don’t know by how much, as it has to adjust for the spin-off of WBD.
However, typically what happens after this is that confused shareholders sell both their WBD shares and, in many cases, their AT&T shares. They don’t know what to do with the WBD stock so they sell it. But they see that the T stock price is much lower and so they sell it to “save” what value is left.
Astute value investors have seen this happen very often. They tend to swoop in during the selloff period and pick up shares. So, most people should hold on to their T stock shares now.
But they should also set aside money to buy more shares once they see the selloff start in both the WBD and AT&T shares next quarter (post the spin-off event).
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.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
