AT&T (NYSE:T) produced its third-quarter earnings on Oct. 21. But as might have been expected, the wireless company gave no further news on the closing of its upcoming structural changes. More importantly, T stock shareholders also received nothing new about the company’s proposed dividend cut, which might come sometime next year.
Because of this, investors can now expect this stock to not move much higher at all. Without confirmation of whether or not the dividend will really be significantly cut as originally proposed, investors have been left in the dark.
Here’s what you should know about T stock moving forward.
T Stock and the Upcoming Dividend Cut
Here’s why this is important. On May 17, AT&T said the following in its presentation:
“After close and subject to AT&T Board approval, AT&T expects an annual dividend payout ratio of 40% to 43% on anticipated free cash flow1 of $20 billion plus.”
This implies that the dividend cost will be between $8 billion and $8.6 billion, or $8.3 billion on average. Now, in the last 12 months to Jun. 30, the company spent $15.05 billion on dividends according to Seeking Alpha.
So, this implies that the new dividend for T stock will be 55% of the previous dividend cost (i.e., $8.3 billion / $15.05 billion). In other words, the dividend could fall by 45%.
What Management Says
When asked about the dividend policy on Oct. 21 by Simon Flannery of Morgan Stanley, CEO John Stankey gave a disjointed, rambling answer. As his statement appears in the transcript, Stankey seemed to not want to be tied down to any particular number and did not address the dividend issue directly.
Stankey talked about the company’s reliance on regulatory authorities to approve the Warner Media-Discovery combination. The CEO also said that it might not be until they were “a little further along in that process and […] have some degree of visibility.” He clarified:
“[W]e can step back at that moment, look at where the stock price is, how things are standing in the market at that point in time. And we’re starting to get down to that window where people would need to make a decision, then we’ll be giving you some visibility around what we think the right path forward is around that.”
Based on this, it looks like the T stock dividend policy will not be so cut and dry in terms of a 45% to 50% cut.
The Dividend Yield
So, it seems like T stock might be able to escape a huge dividend cut. But of course we can’t be sure about this. After all, in May, the company had been very specific.
For example, even if AT&T makes an $8.6 billion dividend payment next year, that works out to 4.72% of its $182 billion market capitalization.
But here is the problem. Right now, investors have given the stock an 8.07% dividend yield. This is because the $2.08 annual dividend payment, divided by the Oct. 21 price of $25.76, works out to 8.07%. This high yield typically implies that investors expect a large cut.
Therefore, once the dividend is cut, T stock will likely fall to the point where its dividend yield is much higher than 4.71%. For example, if a 45% cut to the dividend goes through, the dividend will be $1.144 per share annually.
If the market pushes the stock down to give that a 6.5% dividend yield, the price would fall to $17.60 per share (i.e., $1.144 / 0.065 = $17.60). Even if the yield goes to 5%, the price will still fall to $22.88 per share. This implies a drop in T stock from $25.76 on Oct. 21 — a price between $17.60 and $22.88.
Bottom Line on T Stock
Keep in mind that shareholders will also receive shares in the new company, Warner Bros. Discovery. CEO John Stankey has indicated he thinks the spinoff will be worth $7 to $8 in value per AT&T share.
Therefore, even if T stock falls to $17.60 at a 6.5% dividend yield, shareholders will also receive up to $8 in value from the spinoff. That will bring the total value to between $24.60 to $25.60 per share.
In addition, it is possible that the new spinoff company could end up paying a dividend. But there is also no guarantee of this.
So, it is easy to see why — with all this uncertainty — AT&T stock has fallen to $25.76 as of Oct. 21. Shareholders need clearer information. They need certainty about their future dividend before T stock continues to waiver with very little upside.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any position in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.