Dividend cut

AT&T shares fell 5.8% on Tuesday, following a 3% fall on Monday, as investors react to the company's announcement of a 40%-43% cut in its dividend payout ratio.

AT&T shares rose initially on Monday before falling in the second half of the trading session.

The initial rise was due to positive estimates of a future merger between AT&T's media division WarnerMedia and Discovery (DISCA) into a separate standalone company that could become a strong competitor to Netflix (NFLX) and Disney+ (DIS).

Most market experts have welcomed such a move by AT&T, as trends suggest that only the strongest will win in the global video streaming industry. The merger of HBO Max with Discovery+ and their synergy with WarnerMedia's film studio should yield better results when the companies work together.

Under the terms of the agreement, AT&T will receive $43bn, allowing the company to reduce its debt burden to a whopping $180bn as of 31 March 2021. AT&T shareholders will receive a 71 per cent stake in the new company. The deal is expected to close in mid-2022.

Analysts have long urged AT&T to focus on investing in its core cellular and internet business developing its 5G networks and investing in fibre broadband.

According to a press release, AT&T expects its 5G C-band network to reach 200 million people in the US by the end of 2023. By the end of 2025, the company plans to expand its fibre-optic coverage to cover 30 million access points.

At the same time, AT&T has indicated that its dividend will be adjusted to reflect WarnerMedia's distribution to AT&T shareholders once the deal closes. After the deal closes, AT&T expects its annual dividend payout ratio to be between 40% and 43% of its expected $20 billion in free cash flow. The share buyback opportunity will become 2.5 times smaller. As a result, AT&T's dividend will be about $8bn a year, compared to the $15bn the company paid in 2020.

It is worth noting that at current prices, AT&T stock has the highest dividend yield among other components of the S&P 500 index.