AT&T Unwinds Its Media Strategy

CEO John Stankey has wasted no time putting his mark on AT&T T and we like the direction he’s headed. AT&T announced plans to spin off WarnerMedia and immediately merge the firm with Discovery to create a new media company. AT&T shareholders will own 71% of the new entity, which will assume $43 billion of AT&T’s debt load. The deal essentially completes the unwinding of former CEO Randall Stephenson’s strategic vision, which we’ve long considered ill-conceived, as reflected in our Poor capital allocation rating.

While we like this move, we don’t expect to change our $36 fair value estimate. Combining WarnerMedia with Discovery should enhance the value of the new firm, though not to an extent that we expect will have a huge impact on AT&T's worth overall. The transaction does highlight the value of WarnerMedia, which we suspect would be trading well in excess of the roughly $100 billion AT&T paid for it, net of divestitures, if it were a stand-alone firm today. We also wouldn't rule out the possibility that another firm makes a play for WarnerMedia--we still believe it would pair well with Comcast's NBC Universal--but we wouldn’t count on it, either. We view AT&T shares as fairly valued.

AT&T used this announcement as cover to cut its dividend substantially. The firm will target a payout of around $8 billion-$9 billion annually, down from nearly $15 billion in 2020. While this shift will likely disappoint shareholders, we think it makes sense, especially considering the market hasn’t given the firm much credit for the payout, holding the stock’s yield around 7% in recent years. The firm will set the dividend at around 40% of free cash flow, down from more than 60% in 2020, leaving substantial excess cash to reduce leverage or take advantage of opportunities, including share repurchases. That free cash flow figure also contemplates a sizable increase in network investment, notably in fiber infrastructure, which we believe is important to AT&T’s long-term health.

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