AT&T stock heads for worst day in 11 months as future dividend cut is seen as ‘somewhat surprising’

AT&T Inc. shares are heading for their worst one-day performance in nearly a year, as investors continue to digest the company’s decision to reshape its business yet again with a split from WarnerMedia to Discovery Inc.

The move will allow AT&T T,
to refocus on its core telecommunications strengths – wireless and fiber – but the company is making other changes as well. Notably, the company has revealed it will ‘resize’ its dividend after the $ 43 billion deal closes, with AT&T looking to aim for a 40% -43% payout ratio on more than $ 20 billion in cash flow. of available cash.

See more: AT & T’s $ 43 Billion Deal with Discovery Will Help Reduce Debt Ahead of Expensive 5G Build

Stocks are down 5.8% in Tuesday afternoon trading and on pace for their largest single-day percentage decline since June 11, 2020, when stocks fell 6.1%. Although AT&T shares rose 5.1% intraday on Monday after the deal was announced with WarnerMedia, they ultimately closed Monday’s session down 2.7%.

CFO Pascal Desroches said in a conference call with investors Monday morning that AT&T is focusing on “where can we deliver the most attractive returns to our shareholders” as the company believes “to invest more in our activities is essential ”. He expects the company to “still have a really healthy dividend” with a return that would place it in the 95th percentile of dividend payers.

The dividend announcement was “clearly negative,” wrote Raymond analyst James Frank Louthan IV in a note to clients on Monday afternoon. The company’s target involves a roughly 45% reduction in AT & T’s dividend from current levels, according to its calculations.

“This departs from previous comments in which we viewed management as the ‘golden standard’ for keeping the dividend a sacrosanct principle of its shareholder value proposition,” Louthan wrote. “This about-face of the strategy, which was to maintain or increase the dividend at all costs, will likely remain in the minds of investors for many years to come.”

Louthan, who is bullish on AT&T stock with an outperformance rating, noted that shareholders would at least be likely to see four more dividend payouts at current levels because AT&T does not expect that. the WarnerMedia deal will be concluded before mid-2022.

At current prices, AT & T’s stock has the highest dividend yield among the constituents of the S&P 500 SPX Index,
at 7.04%.

AT&T shareholders will also take a stake in the combined company formed by WarnerMedia and Discovery DISCA,
“So there is at least some compensation for the reduction and the split sets up the new company for a better long-term growth profile,” he wrote.

Truist Securities analyst Greg Miller called the “reset” of the dividend “a clearly negative event,” but said he “probably needed to avoid much worse conditions at a later date.”

“Although the company reiterated that it would be in the 95th percentile of all dividend contributors with a yield of around 4% (~ 7% before the announced cut), pairing this cut with rate hikes expected tax rates and increased capital spending, we believe the payout ratio may be under further pressure after already falling from our estimate of ~ 63% in 2022, ”continued Mr. Miller in a note to customers on Monday.

It has a hold rating and a target price of $ 30 on AT&T shares.

William Blair analyst Jim Breen called the dividend cut “somewhat surprising given the focus on earnings for some shareholders.”

“However, we note that after the close, AT & T’s dividend yield will be in line with that of Verizon VZ,
… At around 4.5%, which makes sense given that companies will now be similar from a business point of view, ”he wrote in a note to customers on Tuesday. “We believe AT&T has grown too large in recent years, which has limited its ability to operate effectively.”

According to Breen, the deal will put AT&T on a healthier financial footing, giving the company more flexibility to invest in its 5G build. It has a market performance rating on stocks.

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