It is difficult to see much positive in AT&T (NYSE:T) stock following the Warner Media spinoff. That is, unless you believe that AT&T is better now that its renewed focus on communications significantly improves the company.
Maybe it does. After all, the Warner Media business hasn’t done AT&T share prices any good overall. It agreed to buy Time Warner in October 2016 however, shares have lost approximately one-third of their value since then. That suggests Time Warner wasn’t accretive during its ownership.
But simply dropping Time Warner isn’t proving to do much positive either. T stock fell on the news and it has remained flat since.
Where to Now?
AT&T got rid of an unproductive asset. There’s nothing wrong with that decision. AT&T seems to be an odd fit for the entertainment business anyway.
My colleague Dana Blankenhorn notes that the company’s communications business isn’t actually strong: “AT&T has been talking for years about ‘5G’ service. It spent $23 billion last year in government auctions for new “C-Band” spectrum and is now deploying it for $8 billion more. The downside is it’s only getting $50 per month on its new business lines. It gets as little as $35/month on consumer plans. To boost that, it’s financing iPhones. This boosts its revenue and gives it the comfort of long-term contracts.”
But AT&T recorded less profits in 2021, $169 billion, than it did in 2019 with $181 billion. Some might think AT&T looks attractive because it lies on the value side of the stock market rather than the growth side, but that doesn’t make sense to me. It hasn’t come close to retracing its early 2000s price levels. The market has entered many value-driven periods in that timeframe after all.
Dividend
T stock has remained interesting because it possesses a significant dividend. However, as reported in the Wall Street Journal, “After the spinoff, AT&T said it expects to pay an annual per-share dividend of about $1.11, down from its most recent $2.08 level. The new payout would cost the company just under $8 billion a year, down from the roughly $15 billion it paid out in 2021.”
That’s nice for the company: It will have roughly $7 billion more moving forward. But the flipside of that is that investors will collectively have $7 billion fewer from AT&T. That high dividend was its saving grace to a large degree.
Now investors will receive far less in dividends. So should investors believe in AT&T’s ability to reward them through stock price appreciation moving forward? That seems to be what AT&T is hoping for based on the move.
The company is essentially asking investors to receive less while it reinvests in its communications business. That in turn will jack up T stock prices. AT least that’s the theory.
What to Do
I don’t really see the bull thesis for T stock playing out in the future. 5G hasn’t provided much yet. AT&T has value metrics in its favor. It has traditional metrics in its favor. Its P/E ratio is in the upper quintile of telecom companies for example.
But it has been a value play for a long time. It simply spun off Time Warner, another bad acquisition by the firm. More importantly, it also announced that its dividend is going to be slashed. That’s the primary reason why investors should stay away.
AT&T remains a legacy business that is now moving nearer what it has always been, a communications company. But it has had a long period of trouble and its Time Warner divestiture doesn’t fundamentally alter that truth.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions 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.
