Why I sold AT&T
And why I owned it in the first place
Last week we had quite a shocking announcement from AT&T and Discovery that both companies would be merging and spinning off the content division into its own standalone company separate from the remaining AT&T business.
As a result of this announcement, and after spending a couple of days researching and thinking on the matter, I decided to sell my position in AT&T at $29.09 per share.
In hindsight I waited too long to sell, if I had pulled the trigger and sold it the moment the announcement hit, I would have been able to sell at $33 per share.
My delay cost me dearly, however I still exited my position at a profit in terms of capital gains, and of course I received dividends in the mean time.
Why I owned AT&T
At the time that I sold it, AT&T was my fourth largest individual holding, and even now in terms of total dividends paid it takes the second spot right after Realty Income.
This was a company in which I had a considerable amount of money invested in, and which I firmly believed had a bright future ahead of it.
There were several reasons why I owned it, but essentially it is because AT&T had the following:
Stable consistent business with high cash-flow in their communications sector
A clear growth path in their media sector
A price that reflected a significantly undervaluation of both of the previous points
In addition to these reasons AT&T also filled a specific role in my portfolio, that of a safe and high yielding (though low growth) holding that would pay me dividends while other holdings grew into their yield.
This means that I was expecting that the stable and consistent cash-flow from the communications business would be able to not just provide the funding required to grow Warner Media and the rest of the AT&T media business, but that it would also be used to pay out a relatively high dividend.
What the merger and spinoff meant
Unfortunately the merger and spinoff announcement essentially killed my investment thesis.
First, the announcement made it clear that we are looking at a dividend cut.
While dividends were not the primary reason for my investing in AT&T, the fact is that AT&T occupied the “High Yield, Low Growth” spot of my portfolio.
The dividend cut removes it from that category, without making it clear into which category it will then be placed in. Additionally the spin-off company has an unclear dividend policy which too makes it a tough sell.
Second of all, I was expecting that the media business was going to be driving growth in the company, but that to do so it would requires large amounts of cash to fund its content creation. This cash would come primarily from the free cash-flow generated by AT&Ts communication business.
Spinning it off into its own company effectively removes that source of cash, and I find it unlikely that the new company will be able to self-finance in the near future off of its own free cash-flow.
This means the new company will either need to slow down its content creation, reducing its growth potential and leaving it a distant third to its main competitors Disney and Netflix, or it will need to go further into debt…
Which brings us to the debt burden…
AT&T is a highly indebted company, but has managed to made due on its commitments thanks to the high cash-flow communications business. It’s been trying (and failing) to reduce its debt over the past couple of years, but to do so it relies necessarily on its high cash-flow…
With the spin-off, AT&T is reducing its debt burden by about 43 billion, which sounds nice in theory… but its not actually paying off the debt. The debt will still be there, only now its with the spin-off which doesn’t have a high free cash-flow business to pay it off…
This huge debt burden ($43 Billion from AT&T and $15 billion from discovery) makes the new company the most indebted company in the streaming business, which naturally constrains its strategies.
While the rump AT&T will have an easier time paying off its remaining debt (particularly with the reduced dividend), for shareholders this merger and spin-off doesn’t actually make any positive difference (assuming you keep both companies).
In short, AT&T will be left with:
Stable consistent business with high cash-flow in their communications sector
But missing the clear growth path it once had.
The spin-off will have:
A clear growth path in their media sector
But will be missing the cash-flow that would enable to actually take that path forward.
In other words, this just doesn’t work when you separate both parts of the company!.
Good management, and the lack of it
I’m not going to go into too much detail on this matter, because most of it will have already been discussed in greater detail by European Dividend Growth Investor in his latest Sunday with eDGI episode.
Suffice to say that in general I agree with his views on the matter.
I will say this however, the current AT&T CEO John Stankey has been neck deep in the DirectTV acquisition as well as the Time Warner merger, and yet now he is going ahead and selling it off entirely.
Less than three years ago, Stankey was overseeing the integration of WarnerMedia after AT&T closed its purchase of Time Warner, and now he’s spinning off those same assets.
His justifications too don’t make much sense to me, and the arguments that they’ve been trying to divest it since early 2020 falls flat.
This is a total shift in the strategy that he has been driving for the past half decade, and shows a disturbing lack of foresight, either in his previous strategy or in his current one.
This, combined with the chronic inability to focus on reducing debt, and the false assurances that the dividend was safe as recently as the latest quarterly call made me lose all confidence in John Stankey.
I fully agree with Raymond James note, where he said “Management broke the rules Monday and went back on their consistent claims that the dividend was sacrosanct, and that they would protect it at all costs“.
Mr. Stankey attempted to defend his decision, arguing that “The reset dividend will still be incredibly attractive relative to other dividend opportunities in the market”, but as far as I am concerned he has already shown himself to be unreliable by destroying a decades long legacy of increasing dividends that had placed AT&T in the Dividend Aristocrats list.
Billions in shareholder value has been destroyed as a direct result of their mismanagement.
As far as I’m concerned, management is unreliable, and that has crippled the company in the past, and will continue to cripple it going forward.
Going Forward
I will be keeping an eye on AT&T, and it’s spin-off, maybe I am wrong, and the businesses will do better separately.
But for now, I used the cash I got from selling my AT&T shares and bought some Intel with it.
That however is a topic for next time!
Do you agree? Do you disagree?
Are you selling? Buying? Or holding?
Let me know what you think!
And as always, if you have any questions or comments, shoot them on Twitter @TiagoDias_VC or down below!
I’ll see you next time!