AT&T’s Dividend Yield Prediction Implies It Has Further to Fall

Stocks to sell

AT&T (NYSE:T) participated in the Bank of America (BofA) Communications and Entertainment Conference on Sept. 14. The CFO, Pascal Desroches, shed more light on its upcoming WarnerMedia combination with Discovery Inc (NASDAQ:DISCA). He also discussed the resulting expected dividend cut. Since then, T stock has kept falling.

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So far this year, shareholders have been very negative about these upcoming changes. The stock has been in a downward movement for the past four months. It peaked on May 10 at $32.63 per share.

Moreover, by the time its Q2 earnings were released on July 22, T stock had dropped to $28.01, or a fall of 14.16% from its peak. Since then, the stock has drifted down to $27.10 as of mid-day Sept. 20.

AT&T’s Total Return Issues

The problem for most investors is that T stock is now well below its starting point at the beginning of the year. It closed on Dec. 31 at $28.76. That means as of today at $27.10, the year-to-date (YTD) performance is a loss of 5.77%.

But given its $2.08 annual dividend (which stayed the same this year), the dividend yield at the beginning of the year was 7.23%. That means the stock’s 5.77% drop YTD has eaten up most of the dividend return. For example, the total return YTD is only 1.46%.

Right now, T stock has a prospective 7.675% dividend yield. However, that assumes the dividend per share (DPS) stays level. AT&T shareholders are now aware the company intends to cut its dividend once the WarnerMedia and Discovery combination occurs. I wrote about this in several prior articles.

The Upcoming Dividend Cut

In fact, the BofA conference did mention AT&T’s plan to reduce dividend payments to about $8.5 billion, down from $14.5 billion this year. That works out to a 41.38% dividend payment cut. Depending on the number of shares outstanding after the Warner Bros Discovery combination and spinoff/split-off, that could be a similar cut in the dividend payment.

But when asked about this issue for retail investors, AT&T CFO Pascal Desroches said this at the conference:

“…if you look at the components of our business and with the separation of WarnerMedia, if you — based on where Discovery is trading now, you can surmise what the value of the remaining — of the connectivity business is. And if you look at that in juxtaposition to the $8.5 billion of potential dividend, the yield would suggest somewhere in the 5.5% dividend yield…”

Did you catch that? He expects that the yield will fall from 7.675% today to 5.5% — at least, immediately after the separation of WarnerMedia. That implies at today’s price, $27.10, the DPS would be $1.49 per share. This is a 29% cut from today’s price.

Or is it? Here is another way to view the dividend cut that is probably more realistic. There are now 7.14 billion shares outstanding. Assuming the dividend payments fall to $8.5 billion annually, that implies a DPS of $1.147 per share. That represents a dividend cut of 44.9% from today’s $2.08 rate.

So how does the CFO justify this as a 5.5% dividend yield? Either the share count, post-separation, would have to be much lower than 7.14 billion shares, or the stock price would have to be much higher.

What to Do With T Stock

Investors are not easily swayed by this logic. They realize that after the dividend cut, the stock will likely adjust to the prior 7.3% to 7.6% dividend yield range.

That implies, short of a reduction in the number of shares outstanding (which could happen with a split-off), T stock has to keep falling. For example, if we divide $1.147 by 7.3%, the price has to be $15.71 per share. Even with a 7.6% prospective yield, T stock will have to fall to $15.09 per share. This implies a further drop of $12.01 per share.

But will AT&T actually fall this far? Probably not. For one, shareholders will be able to obtain shares in the new Warner Brothers Discovery stock. As I have pointed out in other articles, this will roughly work out to $7 per share. It is also possible that this new company will pay a dividend as well.

So there is a net potential drop of $5.01 in AT&T stock from here. That still represents another 18.5% drop in T stock to about $22.10.

Most shareholders are not likely to accept this at this time. They will look to wait until T stock settles. The combination and separation of WarnerMedia won’t occur until the middle of next year. Most will wait to see what this will mean for the final share count and dividend payment.

On the date of publication, Mark R. Hake did not (either directly or indirectly) own any of 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 runs the Total Yield Value Guide which you can review here.