Wednesday, May 19, 2021

AT&T is getting rid of Warner Media and cutting their dividend! I'm selling Comcast!

May is proving to be a very emotional month for the stock Market, and here I am licking my wounds after the shocking news about my dearest dividend stock AT&T. In a nutshell, they have announced they are finally giving up on their dream of becoming "a modern media company". Yes, they will sort of spin-off their Warner Media (acquired in 2018) business and merge it with Discovery to from a new company while T will focus on their telco business (which may not be a bad idea). But getting rid of the second largest income generating business (and the only one really growing) in your portfolio doesn't come for free... they will cut their dividend!!!


    WTF T?

    Yes, that was my first question. As a wannabe dividend investor myself, it does hurt to see my number one passive income generator (for 2020 at least) getting chopped to about half. I received roughly €8.82 in T dividends on 2020 and should be getting about €30 by the end of 2021, but considering the Warner Media & Discovery deal is set to close in mid 2022 my passive income will indeed take quite a hit after that.

    But hey! lets be super honest here, how many companies out there are able to keep a 6% to 7% dividend yield sustainably? One of the first things you "learn" about dividend investment is to be aware of the dividend traps (and I'm not saying this is one of them, am I?) which is basically very financially ill companies that keep high dividend yields just to look attractive to shareholders. 

    T has been battling with some issues the last decade (management?), ever growing debt, bad acquisitions (DirectTV), etc, so it was about time for them to take a step back and get their bearings. Unfortunately this time that meant to get rid of their fastest growing business (17% of their current operating revenues!!! T Financial statement 2020).

    So..., what's happening with my dividend?

     Despite the press release not being very clear about the dividend yield target after the deal, there are some hints that suggest the yield could drop quite a bit.

    Attractive dividend –resized to account for the distribution of WarnerMedia to AT&T shareholders. 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 flow of $20 billion plus.

    in their most recent annual report they anticipate the following for 2021:

    Free cash flow of around $26 billion with a dividend payout ratio in the high 50s% range.

    This basically suggests, they are not only reducing their dividend because their cashflows will shrink (which I would be ok with) but they are also reducing their payout ratio from high 50s% to low 40s%... and this makes me very sad.

    During 2020 they produced $27.5B of free cash flow, and payed $15B (54.4%) in dividends, so if they will now pay about $8B in dividends we are talking about a ~46% drop.

    Why is this a good idea?

    In fairness whether this is a good idea or not, only time will tell, but there's a few reasons why this could pan out well for both T and Discovery. 

    More focus

    After this deal T will get to focus on what they do best, and what they've been doing for ages now and that is telecommunications (T holds >40% of the wireless subscriptions in the US!). Yes, unfortunately this is not a rapidly growing business, however is certainly something that is here to stay and T has the know-how and the infrastructure. 

    Other competitors like Verizon are also getting leaner by getting rid of Yahoo, so this may have added some spice to the mix.

    Can we all feed from this pie?

    If we take a look at the streaming or media companies out there turns out there's a bunch of them (order may not be accurate)! Netflix at the top, followed (and getting closer) by Disney, then perhaps Amazon Prime, Apple TV, Hulu, HBO Max, Discovery, Peacock, etc. How many of these will be around in 10 years? There's no way on earth consumers will have these many subscriptions, some of these will merge and some will go into oblivion. Then.. why not merging earlier and try to fight for a position at the top? 

    Chances are the new company born out of the merging of Warner Media and Discovery will have a good chance of positioning itself somewhere between positions 3rd and 4th in media streaming world, if they play it right. Between the subscriptions they have and the library content of Discovery+ and Warner this could happen, but again... only time will tell.

    What are shareholders getting out of this? 

    At the end of the day I think it comes down to:

    • A more lean T company with lower debt and 100% on telecomunications
    • Shares on a new company, still unnamed
      • Media focused, merging content between Warner Media and Discovery.
      • Hopefully in good shape to fight for a position at the media streaming podium.

    What am I doing?

     Well, a few days ago I almost sold all my T shares (15 xD), however I've cooled down and decided to take a different approach.

    I don't own any of the big streaming media companies at the moment, so T was sort of my entry in that sector, I also own some Comcast shares I bought back in May 2020 for about $34. Honestly, I'm afraid Comcast will be the one hurt the most with all this, their communications business is shrinking, Peacock is not really adding much to their revenues and their Parks have had a terrible 2020/2021 seasons. So...

    • I'm keeping my T shares
      • Yes, dividend will drop, but (in theory) will still be >3% I have as target
    • I'll gladly welcome any WHATEVERISFINALLYNAMED company shares
      • This might turn to be a good streaming play in the coming years.
    • I'm selling Comcast
      • Their current yield is 1.82% 
      • They are not growing
      • Their Peacock streaming service will have tougher competence ahead.

     Hey, this took me a few days to see the light, but I'm happy of doing it. Hope you all are doing great, let me know what you think

    No comments:

    Post a Comment

    Update #012 - March 2022