AT&T Stock’s Dividends Cut Could Cause a Drawdown in Stock Price

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For many years AT&T (NYSE:T) stock has been one of the dividend aristocrats that investors have turned to for inflation-beating returns. However, the planned restructuring of the firm, along with an array of economic headwinds, has caused a shift in investor sentiment.

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AT&T is a mature company with a low stock beta which means that it has little appeal as an investment unless you’re being rewarded with dividends.

I used financial theory and anecdote while analyzing the stock’s prospects going into 2022, and I don’t particularly like what I saw; here’s why.

The Big Restructuring Plan

AT&T has chosen to streamline its business model and emphasize core business units as it prepares to throw everything it can into the 5G rush.

The firm sees 5G as an ultra-competitive sphere in which it will need to cut ties with its low sales to CapEx segments to maximize operating profits and liquidity as it embarks on its 5G journey.

Earlier this year, AT&T agreed to a spin-off deal with Discovery in which it will receive $43 billion and 29% ownership retention of its media business, Time Warner.

The additional capital with continued income from the now separate entity will allow AT&T to repay its current debt and agree to a lower-cost debt restructuring for its 5G spending spree.

Furthermore, AT&T has sold other units, namely Playdemic to EA Games, TMZ to Fox, Vyatta Virtual to Ciena, Crunchyroll to Sony. This string of spin-offs and sales will increase liquidity, simplify operations, and allow the firm to embark on a progressive business strategy.

Although AT&T’s adding liquidity to its balance sheet, it’s well documented that it will spend heavily on new business ventures, which could take their time to become cash-flow positive. In such a scenario, we’ll see a depleted balance sheet which isn’t ideal from an investors’ vantage point.

Trailing Dividend Capacity

There are a few dividend capacity concerns based on historic data. AT&T’s dividend payout ratio is trading 9.8x above its 5-year average, with its dividend coverage ratio also trading at a 1.61x premium. These data points suggest that a mean reversion in dividend payouts is due regardless of the firm’s restructuring plans. 

Many may disagree with me seeing as T stock has been the ultimate aristocrat for the past three decades, but the downward trajectory has actually already started.

AT&T’s management will reportedly cut the dividend yield by approximately 50% in 2022, citing the fact that a smaller company requires a smaller dividend.

This move by management could be problematic for T stock as it diminishes the attraction of its investment profile. If dividends aren’t going to beat the current inflationary environment by a significant amount, investors may seek to invest in other aristocrats or high-yielding bonds. The roll-on effect of less investor demand means that T stock could experience a drawdown due to an abrupt sell-off.

There’s thus no reason for investors to stay invested during a restructuring period, which of diminishing cash flows, balance sheet liquidity, asset fair value, and shareholder benefits.

Bottom Line

The stock has experienced a recovery since its sell-off during mid-2021 to reach an annual return of –13.84%. Although AT&T has recently broken through its oversold relative strength index (RSI) range of 30.00 and now trades above its [10- and 50-day] moving averages, I still don’t see many idiosyncratic reasons for its fortunes to change in 2022.

The market has provided systemic support over Christmas with plenty of tactical dip-buying going on, but as this subsides in the new year, there’s no reason to think that AT&T stock will be one of 2022’s winners.

On the date of publication, Steve Booyens did not hold any long or short positions in any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, BenzingaGurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG. 

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