AT&T in Limbo

Investors do not like mysteries. That's clearly the case with AT&T, which is shedding its media properties to focus on -- and invest in -- its core telecom operations. "Management is navigating the right playbook," analysts at Oppenheimer wrote today and many on Wall Street would agree. At the same time, the stock is remarkably cheap, trading at 7.7 times estimated 2022 earnings, compared with 19.7 times for the S&P 500. 

Yet there is that matter of how the media properties will be shed in its deal with Discovery. After the company reported fairly strong fourth-quarter results today, the stock tumbled. My colleague Nicholas Jasinski wrote on Barrons.com today:

Overall, it was a decent fourth quarter, continuing a recent streak of solid operational performance by AT&T. But that’s not the only thing that matters to many investors eyeing the cheap shares these days. The company is months away from its separation from WarnerMedia, to leave a telecom-only AT&T focused on its 5G wireless and fiber broadband operations. The specific mechanics of that transaction—split or spin—are still a mystery, as is AT&T’s exact dividend policy after the deal. AT&T shareholders will own 71% of the combined WarnerMedia-Discovery.

The details of those mechanics are critical, as AT&T shareholders want to know the extent of their exposure to WarnerMedia-Discovery to get a better window on future cash flows. (The merits of a spinoff versus a split were discussed by Barron's Andrew Bary earlier this month.)

With no details being offered today, shares of AT&T fell 8.4%.

Since Barron's recommended AT&T stock in the wake of the deal with Discovery in late May, its shares have lost 14.5%, while the S&P 500 has had a total return of 5.6%.  Nick argued at the time that investors were too focused on a planned reduction in the dividend and were overlooking the company's robust fundamentals and renewed focus.

That's still the case today, and it could set the stage for a rally in the shares when AT&T discloses details about the transaction in early March, ahead of the closing of the deal. To be sure, investors may also want to wait for evidence that AT&T management has put its media ambitions and deal-making well behind it first. The company said today that the WarnerMedia transaction would close in the second quarter. 

Getting there has been a journey, as John Stankey, AT&T's CEO, noted in a response to a question about the process in the earnings conference call, saying that the board has "carefully considered a lot of different options -- there are pros and cons to going either with a spin or a split."

Stankey added, according to a Sentieo transcript:

It’s a bit of an unprecedented transaction in size. There’s never been a split off of anything close to this number of shares with this kind of a base. We also have a very large retail base, and we have to be mindful of the fact that, that retail base sometimes doesn’t go as deep on the puts and takes and ins and outs of things as the institutional base does. And we need to make sure it’s transparent and clean for everybody involved in this…..

This is all about driving shareholder value.

March is already shaping up to be an interesting month for stock investors.