AT&T Could Have a 6.3% Yield or Higher After the Upcoming WBD Spinoff

Mark Hake

AT&T (T) is planning on spinning off its WarnerMedia division in a merger with Discovery, Inc. (DISCA) very soon. The new company will be called Warner Brothers Discovery with the ticker WBD. AT&T stock is starting to reflect this spinoff, as well as the proposed dividend cut.

The spinoff will occur sometime in early Q2. Investors in AT&T will keep their shares and will also receive 24 shares in WBD for every 100 shares of T stock they own.

However, based on the Jan. 26 announcement by AT&T, the dividend will be cut to $1.11 annually, down from $2.08, a drop of 46.63%. However, investors should be careful when they assess what the new dividend yield will be.

Here is how that will work.

Calculating the Post-Close Dividend Yield

As of Mar. 10, AT&T stock traded for $23.19. But that does not mean that the new dividend yield will be $1.11 / $23.37 or 4.75%. This is because AT&T stock has to fall by an amount that equals the value of the spinoff of WarnerMedia and the creation of the new company WBD.

In my last article, I showed the math of how that valuation might end up. I calculated that the value of the spinoff could be about $6.59. This reflects a 20 times earnings before interest, taxes, depreciation, and amortization (EBITDA) number for WBD, based on our estimates. That could change, though, as we get more information from AT&T and Discovery.

The market will automatically reduce the value of T stock reflecting the exit of real, cash flow-producing assets out of AT&T. If my calculations are correct, the AT&T stock price will fall by $6.59 to $16.60. Therefore, the new, post-close dividend yield is $1.11 / $16.60 or 6.69%.

Another Way to Calculate the Dividend Yield

Here is another simple way to calculate how much AT&T stock could fall. Right now Discovery has a market value of $12.37 billion, according to Yahoo! Finance. And according to Seeking Alpha, its market value is similar.

Now, since we know that Discovery shareholders will own 29% of the combined company WBD, we can assume that WBD as an implied value of $12.68b / 0.29, or $57.5 billion. Since AT&T shareholders will own 71% of that company, the implied value to them of the spinoff is $57.5b to $12.68b, or $41.82 billion.  And since there are 7.143 billion AT&T shares outstanding, that works out to $5.85 per AT&T share.

Therefore, we subtract $5.85 from the recent price of $23.37 to get the new post-spinoff price of AT&T stock: $17.52. As a result, the new dividend yield will be 6.3% (i.e., $1.11 / $17.52).

This shows that AT&T stock will still have a very high dividend yield, even after the spinoff of WBD shares. Moreover, we still do not know yet whether Warner Brothers Discovery plans on paying a dividend or not. I consider that unlikely since Discovery has not been paying a dividend.

What to do With T Stock

This spinoff will be a tax-free transaction. However, investors still need to calculate their tax basis in both T stock and WBD stock. They should be aware that if they sell their WBD shares, they will have to allocate a portion of their original investment cost in AT&T stock to the WBD shares.

Typically, the spinoff company will provide information for investors to be able to calculate this basis. It will be in the FAQ section of the investor relations portion of the website after the closing of the spinoff.

However, I do not think that investors should prematurely sell off their WBD shares just because the new T stock will have a high yield. The thinking is that they would then buy more shares in AT&T in order to get the same level of dividend payments. The problem is that you will have to pay a capital gains tax on the sale of the WBD shares based on the appropriate tax allocation of both shares.

Therefore, if you have a large number of AT&T shares, you should consult with your tax advisor to figure out the best approach to take. It might actually make more sense to buy WBD shares, as they are likely to fall when investors sell them off.

By the way, don't forget to fully "Follow" me and make sure to download the Newsbreak app to become a Registered Follower. This way you can also see all my articles in the past. Click on the link underneath my profile name.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities.

I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Mark Hake writes articles on InvestorPlace.com, Medium.com, and Newsbreak.com on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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