AT&T Stock: Should I Sell, Reduce Position or Hold?!

As we all have heard the AT&T news that dropped on May 17th, AT&T is spinning off WarnerMedia to merge with Discovery, to create a massive organization in Entertainment.

The stock market instantly loved it, for only a few hours.  The stock price has shuttered due to the devastating dividend news of AT&T having to reduce their dividend?  In this article, I will list out the options I, and many of us, have on the table.  The question has consistently been, do you sell your AT&T stock, now?

AT&T and the WarnerMedia, Discovery Entity

The deal, combines the WarnerMedia division of AT&T, which includes HBO Max, TNT, TBS, WB, CNN, Cartoon Network and DC to name a few; with Discovery Plus.  What does Discovery Plus include?  Discovery includes the Food Network, HGTV, TLC, History and Lifetime.  This is one content heavy and media producing company.

This is a $43B deal, with AT&T receiving $43B.  The $43B is going to be composed of cash, debt securities in the new entity and retention of AT&T’s.  This will absolutely reduce AT&T’s debt and interest payments.

Then, AT&T (T) Shareholders will receive 71% of the combined entity, with Discovery’s (DISCA) shareholders receiving 29%.  This shall be interesting.  This should close in mid-2022 and the new entity is expected to have $53B in revenue with $14B in adjusted EBITDA.

Now, then there was the not so great news for dividend growth investors and that has to do with AT&T (T) and their dividend, of course.  We have all heard and read the news…

AT&T’s Dividend Cut or Dividend Reduction

I know AT&T (T) shareholders were curious what the dividend payout will be.  AT&T plans to have expected free cash flow (FCF) of around $20B and they want the payout ratio, based on FCF, to be at 40-43% or around $8B on over 200 million shares outstanding.

Currently, AT&T uses around $15B of cash flow on their dividend.  Therefore, this is reduced by ~47%.  AT&T currently pays $2.08 per year and one could/should anticipate, come next year, summer time, the annual dividend will be somewhere around $1.08 to $1.12, but more than likely $1.10/$1.11.

I (Lanny) own 263 shares, so for the dividend to be reduced by $0.98, that’s a HUGE impact on my forward income, to the tune of ~$260 or almost $22 per month in dividends.

Granted, you’ll get shares in the new company.  How many?  What will their market cap really be?  A few articles valued the company at $130 billion, we shall see.

Therefore, as an AT&T (T) and dividend growth investor, what is one to do?  Heck, AT&T used to be on our Top 5 Foundation Dividend Stocks!  There are a few options.

AT&T Stock Avenues to Take

First, I can hold and be okay with the AT&T stock in my portfolio.  The dividend will be down by 45-47% and I can continue to reinvest the AT&T shares each and every quarter going forward.  I can reinvest the shares at the $29-$30 price point it’s been at to end the week, which would equate to more shares with the merged entity at the close date.

Second, I can completely sell my AT&T stock position.  If you haven’t watched our YouTube video, see below and definitely check out the comments there, as many have sold out completely, of their position:

I can eliminate my position, which would be approximately $8,000 before taxes.  I then would have to deploy the capital elsewhere, such as Verizon (VZ); whom has been on my dividend stock list.

Third, I could reduce my position, say to 200 shares, and take off around $2,000 worth to re-deploy the capital elsewhere.  Heck, I could even redeploy into my Vanguard (VYM) position. This would bolster VYM, to which VYM has DIVIDEND GROWTH, which we know is critical in this financial freedom journey.  The impact here could be a net reduction in the immediate term, but with anticipated growth each year with VYM.

Lastly, to go back to the first idea with holding the AT&T stock, I could technically STOP the Dividend Reinvestment.  The quarterly dividend I receive from AT&T in my taxable account stands at $136.76 right now.  Therefore, conservatively, I could continue to use the proceeds and reinvest elsewhere.  That could amount to $500 to invest into another undervalued dividend growth stock over the next 12 months.  Tough decisions for a dividend investor.

Luckily, AT&T only represents 2% of my taxable brokerage account and doesn’t impact the value or income in a material way, as the income is less than 5%, as well.  That helps in my decision process, as I couldn’t imagine what it would be like if they were 10-50% of my portfolio, definitely would have to make drastic moves, no doubt.

I am actually okay with management’s decision here, cleaning up what AT&T wants to focus on – wireless and broadband.  There was no way to continue deploying significant amounts of capital to battle Netflix (NFLX) and Disney+ (DIS) in streaming.  Content requires significant capital, year in and year out, and so does the battle of 5G and even the next generation of technology after that.

Therefore, is AT&T a better company, taking the dividend out of it?  Sure, it appears so.  Is this great for dividend investors?  Short answer, no – not in the short run.  It may take 10-13 years for the dividend to grow at an average rate of 3-5% with the yield being between 3.5%-5.% to catch up to where it currently is for AT&T.  That is, with an expected dividend of $1.10 per share starting next summer, at a price of $25-$30.

At&T Stock Conclusion

Fortunately, I do not have to make a decision right now.  I would love to read more about the new merged entity, the value that could bring.

The time is ticking.  As of right now, from the 4 options listed above, today, I rank my options in this order: 4, 1, 3, 2.  That is purely due to not having all of the information needed to make a sound decision.

The stock price has stayed volatile, as well.  First, AT&T’s stock price had shot right up to almost $34 and by the next day was as low as the mid-$28’s.  At May 20th’s close, AT&T (T) popped back up close to $30 per share.  Therefore, there is still a lot to be said and information to be received.

How about you?  Are you selling?  Did you sell already?  Somehow, did you buy more?  Or are you waiting, as well, to find out more about the new company?

Share your thoughts and feedback below, as I love seeing the view points.  The dividend growth investing isn’t easy, but this shows it pays to be diversified.  Good luck and happy investing everyone!

-Lanny

25 thoughts on “AT&T Stock: Should I Sell, Reduce Position or Hold?!

  1. T will continue to grow it’s dividend and the other company doesn’t plan to pay a dividend. I’m keeping T, selling the other company and putting the funds I receive from that sale back into T.

    • Tim –

      I agree. They’ll be growing it – more than likely in November of 2023 is my expectation. How about you?

      I never considered selling the other company once you receive it.. wonder what will happen with the price point?

      -Lanny

  2. I sold my entire position around 8K. Being a dividend growth investor – I hate how management give us little notion of dividend cut until now. We should have known something was up when normal dividend increase didn’t happen and management stayed at .52 cents per share for 6 periods.
    Once people realize the dividend is going to get cut in half stock price is going to drop. I may look to start adding back position in 6 to 12 months after the price drops in T.

  3. Well… I own 463 shares and T’s dividends count as 8.5% of my portfolio’s dividend income (as of now). So, yeah… I will take a big hit to the dividend gut. But like you said, we don’t have to make a decision right now. I plan on holding and waiting until more information becomes available. We will see what the final deal will be and what next year will bring.

  4. Tough call, T’s management has managed to cut the stock price by what 70% since all time highs, and now voluntarily taken said stock out of the Dividend Aristocracy? Seriously, will keep some sort of div, and shareholders (at least at this point) will get a good portion of shares in new company, which could be another dividend opportunity, could be Gold, could be pure garbage and go to 0. If I had a large position (I don’t) I’d probably trim some (35-60%) on green days, and reinvest in a mix of high dividend stocks/ETF/ETNs and Dividend Aristocrat/Champion stocks.

    • PRC –

      Love the perspective. Right – could take some off the top at the $34-$36 range (if it ever gets back to there), between now and next summer. Such a debate here. I love it.

      -Lanny

  5. AT&T has been nothing but a sideways stocks. The only reason I owned it was for the dividend which is going to be cut.
    The spent a lot of money on Direct TV, TIme Warner and fought with the government over anti-trust implications, they have dumped Direct TV which they should never have bought, the are spinning off Time Warner after about 2 1/2 yrs and the announce they made in Q1 about being committed to the dividend turns out to be false.
    I have no faith in T’s management or board of directors at all.
    Sold all shares and bought VZ and NHI.

  6. Since T only comprises about 2.5% of my portfolio’s dividend income, I’m fortunate enough to have the ability to sit back and wait things out until the dust clears. As more details come in over the next year, I think I’ll have a better idea of how to proceed with my T position.

  7. AT&T is half my income, having inherited it 10 years ago. I am taking a huge hit. Don’t know which way to turn being a senior person and possibly not having another decade to wait and see. Any advice?

    • TDR –

      Great question. First, one can always sell the new stock and buy more AT&T stock after the spin-off happens – that could recoup a lot of income.

      Do you use the dividends for expenses right now?

      -Lanny

  8. Lanny,
    I use dividends for surprise expenses such as house repairs, medical, etc. After reading comments I’m leaning toward wait-and-see. Not an adventurous investor 😬

  9. Given AT&T’s history (remember McCaw cellular?), it should be no great surprise that corporate missteps continue to this day under a number of ‘leaders’. I sold most of my shares about 1999 at about $68, retaining only enough to keep the Comcast warrants I received at retirement (early) active (remember AT&T Broadband?). Comcast remains an overweight position today and T was fully exited until 2019.

    The answer to your riddle is to determine WHY you own the stock. If for the dividend only, it’s probably best to move on. I bought back as a result of the Time Warner acquisition and value of the library (movies, characters etc). If history is a guide, when AT&T changes course, a spinoff tends to thrive – but perhaps without a dividend. For me, it’s a hold.

  10. Lanny,

    I have a pretty decent-sized position in AT&T, so I am really torn on whether I should sell or keep it. On one hand, most of my AT&T shares are in my Roth account and T is trading pretty close to my cost basis and selling out won’t be a tax consequence. On the other hand, T is still going to be paying a not so terrible dividend after the dividend cut.
    As of now I am leaning towards your 4th choice of stopping automatic reinvestment and putting those dividends to work somewhere else.

  11. Sold as soon as it was obvious the dividend was going to be cut buried in that murky press release. Reason I bought was for dividend growth (even at the miniscule rate), that reason went away so the position went away. Only good, was I sold into that fake ramp job that quickly reversed when the dust cleared. It is down over 3 years worth of the new div rate since I bailed.

  12. Hey Lanny,

    Yeah, this news was pretty devastating for many income investors. I only have telecoms north of the border, so this didn’t hit me directly, but it was a huge wake-up call that dividends are never guaranteed. Even in companies that have been paying them for years.
    As you mention, you don’t need to make any knee-jerk reactions for the time being. A reduced dividend is still a dividend, and you can redeploy the capital elsewhere.

    Take care,
    Ryan

  13. Hi Lanny,
    I am the semi-proud owner of 370 shares, 2.8% of my portfolio. In the meantime, I am going with your option #4.
    You know, I actually have always done option #4 with all of my holdings. I take any dividend I receive, and buy whatever fits at the time.
    I have a feeling that I will hold until the new company is split, sell T down to an average holding and sell the new company since they will be focused on lowering their debt to start with.

  14. T is 3.25 percent of my dividend portion of my portfolio and only a fraction of a percent of my overall portfilio. I only have 27.73 shares. I don’t think it makes any sense to sell low right now. I think long-term this will make them more competitive. Maintaining a 7 percent Dividend yield and not making themselves more relevant would have left me with more concerns. That said I don’t like how this was done. And I don’t think I will be purchasing more shares anytime soon.

  15. I have had a position in ATT for a long time and been satisfied with the dividend payout. Recently, I think previous management screwed up with their maneuvers, very amateurish. for now I am holding but will have to sell some. Not sure where will go with it. Some in VZ, then where not sure. Too bad some up and coming companies do not pay dividends and are expensive.

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