Investors are told not to make emotional decisions. Yet, I’ve noticed plenty of emotion regarding the fortunes of AT&T (NYSE:T). As you may imagine, investors have not been pleased as T stock continues to drop nearly six weeks after the company reported earnings.
It’s been well documented that AT&T made the decision to cut its dividend payout after it finishes spinning off its WarnerMedia division. This won’t be finalized for several quarters, so “ride-or-die” investors in T stock have a little time to decide what to do with their shares.
I’d advise to be skeptical, but exercise prudence. The known is always better than the unknown. And for many years AT&T was dealing with a lot of unknowns. Today, there is still a large unknown regarding how successful it will be with its 5G business. However, you could also say that it’s torn off the band-aid. Investors just have to decide how long they will wait on the wound to heal.
Maturing in Reverse
One thing T stock investors always had in their corner was the dividend. And for a moment don’t focus simply on the yield. In many cases, a high yield may say more about what a company is not rather than what it is. But AT&T is a Dividend Aristocrat that has increased its dividend for 37 consecutive years.
That streak will come to an end. And while it may be a necessary and even prudent move, it’s still a hard sell to investors. Normally as a company reaches the mature phase in the business cycle, stock price growth slows, and the company takes steps like issuing a dividend to reward shareholders.
In this case, AT&T is pledging the opposite. It’s cutting its dividend and dangling the opportunity for share price growth in not just one, but two companies. That’s because the company will own 71% of Discovery (NASDAQ:DISCA, NASDAQ:DISCK), the company that is merging with WarnerMedia.
InvestorPlace contributor Mark Hake provided one theory on how this might work:
“…let’s assume that for every 100 shares of T stock, shareholders will receive 30 shares of WBD. Let’s assume that T stock falls by 50%, but that WBD ends up with a value equal to that 50% fall. Additionally, let’s assume that WBD stock pays a dividend that is equal to 50% of the dollar value of the T stock dividend. However, T stock might also rise over time, despite the dividend cut, given that it is now more focused and healthier from a financial standpoint.”
Is 5G the Answer?
Will that strategy pay off? Quite possibly it could. But the time the company spent immersing itself into the world of media, the further behind it got in the 5G buildout. As Dana Blankenhorn wrote, the company’s endorsement of spectrum guardrails for 5G is an admission that they know they are in danger of being left behind.
Even after the dividend cut, Pascal Desroches, AT&T’s SEVP and CFO insists that T stock “will continue to deliver a very attractive yield in the 95th percentile of dividend yielding stocks.” I’ll take his word for it. However, at the very least, this is bad optics.
What’s Next for T Stock?
For many years, AT&T was criticized for losing its way. It wanted to become a media company; but seemed to be a step behind in doing so. Now the company is embracing its telecom roots, but it may be late to the 5G party.
The T stock dividend was the glue that held it together. And now that looks less enticing; particularly for investors who were using that dividend payment for more than reinvesting shares.
In the end, long-time income investors are likely to flee the stock (although probably not as many as are imagined). However, speculative investors that have been frustrated by AT&T’s lack of commitment to 5G may consider jumping in.
I’m not sure if I advocate starting a new position yet. But if you currently own T stock, the prudent decision may be to just sit tight and wait to see what AT&T will do next. At less than $28 per share, it’s going nowhere fast.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.