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Shares of AT&T (NASDAQ: T) declined by 18.7% on Monday to end trading at $19.63. At the time of writing, AT&T stock gained 0.6% in pre-market trading today. Let’s see what impacted the company’s share price this week.
Valued at a market cap of $140 billion, AT&T is one of the largest companies on the S&P 500. Its stock price fell off a cliff after Discovery Communications acquired WarnerMedia from AT&T to create a company which will be called WarnerBros.Discovery.
The new entity will own a robust portfolio of content across entertainment verticals that include Discovery Channel, HBO, CNNM Warner Bros. Entertainment, and streaming services such as Discovery+ and HBO Max.
Each AT&T shareholder will be eligible to receive 0.24 shares of WarnerBros.Discovery. Further, AT&T shareholders will maintain ownership of 71% of WarnerBros.Discovery while the remaining will be held by Discovery shareholders. The newly formed company is valued at a market cap of $12.4 billion.
What next for AT&T stock investors?
AT&T acquired Warner Brothers’ entertainment business a few years back, which now seems to be misguided as the company had to raise debt to fund the purchase. However, after shedding the business, the telecom giant will now train its guns to gain traction in the much-awaited 5G segment.
Several market participants expect AT&T to slash its dividends by up to 50%, following this divesture which has driven the stock lower by 23% year-to-date. Right now, AT&T’s dividend yield stands at a tasty 8.7%. Even if the payout is halved, AT&T will still enjoy one of the top yields among companies part of the S&P 500.
AT&T announced its board has approved paying a quarterly dividend of $0.2275 per share in Q2. So, investors will receive a healthy dividend payout, shares in a new growth entity as well as the widening value in the 5G communications segment.
AT&T has been among the worst performers on the S&P 500 in the last decade. A key reason is the company’s massive debt that stands at $152 billion due to the acquisitions of Time Warner and DirecTV as well as investments in the wireless spectrum.
While AT&T borrowed capital to fund the acquisitions, it has already sold DirecTV and has entirely exited the entertainment segment this year.
Will AT&T stock rise this year?
The new-look A&T is quite similar to the AT&T of old. It is now left with its telecom and broadband businesses, as a standalone company. However, the business exits will allow AT&T to lower debt by $43 billion giving it some much required financial flexibility and breathing space.
Its dividend will also decrease from $2.08 per share to $1.11 per share, indicating a forward yield of 4.6% and a payout ratio of 40%, allowing AT&T to further reduce debt going forward and invest aggressively in the communications business.
On a proforma basis, or after normalizing revenue to account for spin-offs and divestitures, AT&T estimates sales to rise by low single digits in 2022, while adjusted EBITDA is forecast to increase between 2% and 4% and earnings are projected to increase 0% to 2%.
In the next year, AT&T again estimates revenue to grow by low single-digits while adjusted EBITDA and earnings might rise between 5% to 7% and 2% to 7% respectively.
AT&T stock is trading at a discount of 45% compared to average analyst price target estimates.