While AT&T (ticker: T) has talked about creating two stronger companies—a telecom giant focused on 5G and broadband and a streaming business that merges HBO, CNN, TNT and more with Discovery—many investors have spent the week focused on the dividend cut that came with the news.
A plan to reset the dividend, to use AT&T’s words, will reduce the company’s total dividend payout to an estimated $8 billion after the deal closes, from about $15 billion last year.
“Management broke the rules Monday and went back on their consistent claims that the dividend was sacrosanct, and that they would protect it at all costs,” Raymond James analyst Frank Louthan wrote in a note to clients Wednesday.
On Thursday, AT&T CEO
defended the dividend decision in an interview with Barron’s. “The reset dividend will still be incredibly attractive relative to other dividend opportunities in the market,” he says. “I would expect it will still be in the 95th percentile of dividend yields.”
Investors have the option to find other income plays once the spinoff happens, Stankey adds. “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.”
Less than three years ago, Stankey was overseeing the integration of WarnerMedia after AT&T closed its purchase of Time Warner. He was named AT&T’s CEO last summer, and now he’s charged with spinning off those same assets.
Barron’s spoke with Stankey about the new deal and AT&T’s plans going forward. Here are highlights from our conversation, edited for length and clarity.
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.
The post-spin off AT&T is returning to its roots and focusing on its wireless and wired telecom business, while spending an extra $2 billion annually on capital expenditures. What opportunities does this transaction open up that weren’t there otherwise?
One is that we’ll be pushing more aggressively into fiber-based infrastructure. That will be a key portion of the step up in capex over the next couple of years and will support the opportunity for fixed broadband connections across all market segments—a large enterprise or a consumer in a home, and everything in between. Secondly, we’ll accelerate our 5G deployment and the reach and breadth of our wireless network to strengthen our market position and performance. That’s the lion’s share of the incremental investment. Both of those will have very attractive rates of return on a very effective cost of capital given where interest rates are right now.
How do you see the relationship between the surviving AT&T communications company and the new media company going forward? You’ve spoken in the past about reducing customer cancellations by bundling AT&T’s wireless plans with HBO Max, for example.
There will be a continued relationship between the two, but it will be a business-to-business relationship as opposed to an internal relationship. We’ve had really good success in our domestic business by bundling HBO Max with our wireless and broadband services—it drives up customer satisfaction and drives down churn. Those economic benefits are meaningful to the communications company.
They’re meaningful to the media company too, but they’re not as significant as the opportunity for it to grow globally and pursue its direct-to-consumer streaming objectives. That’s why we’re choosing to separate these companies and expose them to the market in different ways.
We’ll continue to do great business with each other and continue to distribute products on the media company’s behalf, but that won’t necessarily be an exclusive relationship. The communications company will have an opportunity to think about other distribution relationships it might want to have going forward, sometimes in media, sometimes in other products and services.
I’ve been getting a ton of emails this week from Barron’s readers, many of them income investors, who are predominantly invested in AT&T stock for its dividend. Many of them aren’t interested in having a streaming growth story in a separate stock. They just count on their quarterly dividend payment to live off of in their retirement. 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.
It’s also entirely possible we may choose to offer an exchange to our shareholders as well, in which they can choose to exchange stock in a different way. We haven’t made any final decisions on that, that would be made closer to the close of the transaction.
Another criticism that some folks have had this week is that the announced spinoffs of DirecTV earlier this year and now WarnerMedia—both big acquisitions by AT&T in the prior decade—are evidence that the portfolio strategy was a failure. Can you respond to that?
I don’t think it was a failure. I think the decisions are a recognition that circumstances have changed. Generating the right kind of returns for shareholders going forward requires us to make an adjustment. I’m not suggesting that I would rather not be in this position. But it’s my job to make sure I evaluate the circumstances around us and when circumstances change, I have to be cognizant of that.
In terms of how it’s worked out, the enterprise value [of the Time Warner acquisition] in 2018 was about $100 billion. Now there’s $43 billion of cash coming back to AT&T, and the WarnerMedia equity value at the time that we announced the transaction was in the $58 billion range. Plus, we took probably $16 billion of cash out of the media business in the past three years and sold about $5 billion of assets. So, that’s well over the roughly $100 billion that we paid.
And if we are correct, when this equity trades, the suppressed value of the media asset being contained within the lower multiple AT&T stock should improve, and it should trade at a higher multiple. That will unlock further value.
I don’t think I would call that a failure on a straight economic basis. I’m disappointed that we didn’t have the longevity of the strategy we envisioned and there are certainly issues of distraction. You could probably argue there might have been some opportunity cost issues. But failure is too strong of a word.
Do you have a name yet for the new WarnerMedia/Discovery media company?[Discovery CEO] David Zaslav
will be making that decision, and I think he intends to disclose it fairly soon. I don’t want to steal his thunder on that.
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