AT&T Inc. (T): Overvalued or Undervalued?    

The stock of AT&T Inc. (T)tumbled 5.8% on Tuesday, marking its biggest one-day drop since June 11, 2020, when it fell 6.1%. AT&T’s shares rose initially on Monday but declined later in the afternoon. At first, the company’s growth was driven by expectations of a merger between AT&T’s WarnerMedia and Discovery (DISCA), which would have become a major competitor to Netflix (NFLX) and Disney + (DIS) in the coming years.

Several market experts praised AT&T’s move, stating that video streaming is a growing market, so only the strongest will benefit. The synergy between HBO Max and Discovery Plus, and WarnerMedia should result in better outcomes when the companies collaborate.

The deal provides AT&T with $ 43 billion, which will enable the company to reduce its enormous debt burden of $ 180 billion by March 31, 2021. In the new company, 71% of the shares will be owned by AT&T shareholders. Mid-2020 is the anticipated closing date for the deal.

Many analysts have recommended that AT&T focus on its core cellular and internet businesses and develop 5G networks and invest in fiber networks. According to a press release, the 5G C-band network of AT&T is expected to reach 200 million US residents by the middle of 2023. A fiber-optic network with 30 million access points is on the company’s roadmap for 2025.”

AT&T Inc. (T) also announced that its dividend would be modified to “take into account WarnerMedia distribution among AT&T shareholders” after closing the deal. The company expects its free cash flow to be $ 20 billion after closing the deal, thereby generating an annual dividend payout ratio of 40% to 43%. Buying back shares will be reduced by 2.5 times. The company will pay roughly $ 8 billion in dividends per year instead of $ 15 billion in 2020.

Pascal Desroches, AT&T’s CFO, said the company’s dividends would continue to be healthy. AT&T was known as paying one of the highest dividends, so investors objected to the prospect of their dividend being slashed by half. Among other components of the S&P 500, AT&T shares yield the highest dividend among the current price level.

Investors Frank Louthan explained that this “clear negative” reaction from AT & T regarding the announcement of its dividend cut is due to its recent departure from its earlier pledges to maintain dividends as a sacred value proposition to shareholders.  An alternative is to maintain or increase dividends at all costs. The analyst pointed out that AT&T shareholders will receive compensation for the reduction by buying shares in WarnerMedia-Discovery. The new company will have a better long-term growth profile.

The dividend cut may seem like a negative development, but Truist Securities analyst Greg Miller said it might be a necessary change to avoid even worse conditions in the future. Jim Brin at William Blair believes that AT & T’s huge investments and massive debt have limited the company’s ability to operate efficiently.

AT&T Inc.’s (T) dividend yield will be in line with Verizon’s at around 4.5% once the deal is closed, which makes sense because Verizon and AT&T will now be identical from a business standpoint. Through the deal, AT&T will be better positioned financially and more flexible for investments in 5G.