While some investors are rushing to sell their shares of AT&T after the company recently announced its plan to cut dividends, this is a perfect buying opportunity for both existing and new investors looking to buy a stock with great growth potential.
“Be Greedy When Others are Fearful” -Warren Buffet
Recent announcements from AT&T (NYSE: $T) on Monday, May 17, 2021, have stirred controversy among investors. AT&T reported that it will merge its content unit WarnerMedia with Discovery (NASDAQ: $DISCA), which would put them in a stronger position to compete against larger entertainment companies such as Netflix (NASDAQ: $NFLX) and Disney (NYSE: $DIS). $T will be spinning off WarnerMedia and all of its assets into a new company that will be 71% owned by shareholders of $T and 29% by shareholders of $DISCA. This partnership is targeted to generate approximately $150 billion in revenue, especially as Discovery would give WarnerMedia global distribution capabilities. AT&T stands to receive $43 billion, which the company announced will be used towards reducing its debt load.
Also emerging from this deal, however, is AT&T’s plan to cut dividends by almost half following this spinoff. This was immediately met with backlash among investors who relied on AT&T, a long-existing Dividend Aristocrat, for consistent dividends. This explains recent trends in the falling stock price of AT&T: Shares of $T fell 5.8% on Tuesday, immediately the day after the news was announced, as shareholders reacted negatively to reduced cash payouts.
What AT&T’s Plan to Prioritize Stock Price Growth Over Dividends Mean For Investors
With the company’s announcements for its future layouts, many investors are debating whether they should buy, hold, or sell AT&T. This article provides a few insights for investors faced with this dilemma.
For income investors who plan to live off dividends, AT&T may no longer be your best bet. You might want to look into an alternative high-quality dividend stock. For growth-focused investors, AT&T’s decision to merge WarnerMedia with Discovery is good news and something to look into. This is AT&T making the initiative to build a bigger empire and strengthen the value of their company over the long run. AT&T up until now gave high, consistent dividends but their price has, for the most part, stayed low. This is the company taking action to change that.
Further, Barron News estimates that with this mega-deal, the price of AT&T could be worth between $30.37 and $41.28 in the future (possibly even more), depending on whether investors believe this new company will look more like Disney in the future. The combined company is targeting an annual $52 billion in sales alone.
Current Market Trend Suggests A Good Buying Opportunity
With the market panic surrounding the prospects of a dividend cut and short-term investors wanting to sell, long-term investors have an opportunity to buy the stock at attractive valuations. At the time of writing, $T is trading at $30/share. A buyer today investing $30 will not only receive $2.08/yr in dividends until the deal is officially closed, but this new company could also be worth about $35-40 when the spin-off occurs in about a year. In just one year, we are looking at a return of 20-40%.
Many view this as a good sign for the company’s growth and are optimistic that $T would emerge stronger than it is worth today. According to Bank of America, “AT&T's stock could jump roughly 50% from current levels as its newly-formed media conglomerate with Discovery unlocks value.
Looking at recent charts, now is a potential buying opportunity for those looking into investing in AT&T. Since March 2021, the price of $T has stayed consistently above the 50-day moving average until just yesterday, when it started to dip below. This is most likely the result of investors who rushed to sell this past week. However, looking into the future, there is solid reason to believe that the price will bounce back up. With the RSI indicating that this stock is oversold, we also expect to see more buying, thus increasing the price.
So who is AT&T good for?
This article, after weighing both sides, demonstrates that investors looking to earn income from dividends as their primary focus may now be better off looking into other stocks. Otherwise, there is good reason to buy and hold AT&T for the long-term considering their growth potential, as mentioned above. Already, many news sources are taking in the bigger picture and reacting to the partnership positively, as AT&T will now be in a stronger position to raise the overall value of their company, considering its price has stayed relatively stagnant under $40 for the past few years.
Many have rushed to sell their shares after they heard the news of AT&T planning to cut dividends. In doing so, many may have overlooked the bigger picture and why the company has decided to do so in the first place. The better question to ask is whether high dividends are a necessity for your portfolio and whether you are willing to switch out for a different stock with higher dividends at the possible risk of losing your position in a company aiming to attain stronger growth than they have reached thus far.
Nevertheless, it is important that investors do not immediately react by hearing news only from one side. Weighing the pros and cons before buying or selling AT&T, designed to one’s investment philosophy and financial goal, will help prevent unnecessary losses and maximize overall returns.