AT&T shares have fallen some 7% since the company confirmed the spinoff of its WarnerMedia assets to combine with Discovery for $43 billion last week. CEO John Stankey defended the stock and his move to unwind a deal that cost AT&T $85 billion and closed just three years ago.
“There’s going to be more value created in the growth of the core AT&T moving forward that all shareholders will enjoy,” Stankey told Yahoo Finance Live, fresh off his appearance at the JPMorgan Technology, Media and Communications Conference. “Admittedly, there’s a couple of moving parts in this transaction and how we’re executing it. So it’s not surprising to me it’s taking a little bit of time to unpack exactly what’s occurring.”
The new entity, to be led by Discovery CEO David Zaslav, will be valued at $130 billion, including debt. AT&T shareholders will receive stock equal to 71% of the new company.
Stankey said he hopes the deal will allow both the WarnerMedia assets and legacy AT&T to be appropriately valued by the market, in part because of the removal of debt on AT&T’s balance sheet.
Currently, AT&T trades at more than nine times trailing earnings, compared with 12.5 for Verizon and a whopping 57 for T-Mobile.
“I would think, when you look at our return characteristics and the momentum we have in the market, there’s no reason we should trade at a discount,” Stankey said.
One obstacle for current and potential shareholders might be AT&T’s pending dividend cut. The company’s dividend yield — a prime motivation for many holders — stands at 7%. After the deal closes, Stankey said, the dividend payout will be $8 billion to $9 billion of annual cash flow, “and that yield is still probably going to be in the upper 95th percentile of yield-paying stocks.”
“We think it’s not only a good place to be with a yield and dividend, but when we reinvest some of the money we free up in great opportunities we have in fiber and continuing our momentum in wireless, there’s going to be more value created in the growth of the core AT&T moving forward that all shareholders will enjoy,” he said.
Stankey isn’t a lone voice in the wilderness when it comes to defending AT&T’s stock (and he’s putting his money where his mouth is, buying $1 million of shares). AT&T got two upgrades on Monday, from New Street Research’s Jonathan Chaplin and UBS’s John Hodulik.
Hodulik raised the stock to Buy, with a $35 12-month price target. In a note, he put the dividend cut in perspective: “While AT&T lowered its dividend by ~45%, the deal structure will provide an estimated ~$7-8 per share in one-time, tax-free payment (in the form of DiscoveryWarner shares), equating to 4-5 years of dividend payment in lump-sum.”
Hodulik also expressed some confidence that AT&T can meet its free cash flow goal of more than $20 billion in 2023. Chaplin, of New Street, is more skeptical, but wrote that even with lower cash flow, AT&T will be able to fulfill its dividend obligations and pay down debt.
AT&T investors still don’t seem entirely on board. The stock closed down 0.87% on Monday.
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET.
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