Defending the Dividend

When AT&T announced its transformative spinoff Monday morning, news about the dividend was buried way down in its press release. The announcement focused on "creating a new global leader in entertainment" that would come from combining AT&T's WarnerMedia business with Discovery in a standalone publicly traded company. The move would allow AT&T to focus on its 5G and broadband business, a costly affair that needed plenty of attention. Investors should've cheered. 

But on page five of the press release, AT&T dropped another bit of news: the dividend was being "resized."

Ultimately, the dividend payout would be falling from about $15 billion to $8 billion. And investors, who have relied on AT&T for its dividend, didn't like that news. The stock fell 10% over three days. Nicholas Jasinski has been covering the fallout all week.

Today, Nick got a chance to ask AT&T CEO John Stankey about the market's reaction to the deal. Here are some highlights from their conversation: 

Barron’s: Are you surprised by AT&T stock’s reaction to the announcement this week? It was down 10% in three days.

John Stankey: No, I’m not surprised. Look, it’s a pretty significant change in the overall capital structure of the business with the balance sheet and what we’re doing with the dividend policy and how we’re shifting on reinvestment. It’s a widely traded stock, and we’re matching with an entity [Discovery] that has multiple classes of stock. As a result of all that, it’s going to be choppy trading for a bit as everybody reevaluates their position. I think we fully expected that going in. I think the stock will ultimately settle in where the value and the operational capabilities are. But it’s just going to take a bit of time for that to work its way through the system.

What’s your message to that constituency of AT&T shareholders who are disappointed by the dividend reduction portion of this week’s announcement?

The reset dividend will still be incredibly attractive relative to other dividend opportunities in the market. I would expect it will still be in the 95th percentile of dividend yields.

The size of the company is changing. We’re separating off 35% of the company [in WarnerMedia,] and also a portion of the [DirecTV] satellite business. You have to resize the dividend when you change the size of the company. That investor can certainly take their equity [in the media company]—I believe they’ll see the recognition of the value of it once it enters the public market and it trades up—and move out of that into a yield-oriented investment. They’ll certainly have the option to do that.

You can read Nick's full interview with John Stankey here.