Justin Sullivan/Getty Images News The time to consider investing in large companies is when everyone is so angry at the company that they race each other into dumping the dog. AT&T ( T ) is in that situation right now because they announced a dividend cut. That announcement caps a few years of perceived underperformance. So the cries of “dog” and “barking” are heard from a lot of disgruntled investors. That means it is time for a contrarian investing research project.
Whether or not investors should have seen it coming is “water over the dam”. The way to make money is to incorporate past behavior into the future. For me, all the reasons (including the dividend cut and the deal with Discovery) for disgruntled shareholders are part of the forward story only as it gives the company more money to repay debt after the proposed deal with Discovery ( DISCB ).
I am a firm believer in diversification because like everyone else, things happen to my portfolio I sometimes do not expect. In this case I expect a successful deal close and that dividend to be back one way or another from the two pieces I will own after the deal closes. In the meantime, I was not so dependent upon the dividend that a cut was going to cause me major financial pain. That is really the key to investing. You need to protect yourself from the unexpected by either watching your investments very closely (AND) or by diversifying to the point where the unexpected will not materially affect your financial position.
The post spinoff dividend of $1.11 is a starting point. Between AT&T and Discovery, there will be enough debt progress made that the two parts combined should exceed the total return of AT&T prior to the Discovery deal close. Spinoffs tend to have a very good post-deal history. There is no reason why this particular spinoff should be an exception. AT&T common stock price history and key valuation measures. (Seeking Alpha Website February 11, 2022) The key idea would be that somehow Mr. Market figures that a rearrangement that puts subsidiaries with companies that know what to do with those subsidiaries has now made the company worth significantly less in the eyes of the market. The question really should be about management’s ability to right the ship after several years of market disappointing results as shown by the stock price action above.
Most likely it is the rush to the exit of income dependent investors that is currently depressing the stock price because this stock no longer fits the income story. With a large company like AT&T, that rush out the door could take a while. Like anything else the market does, the rush to sell usually proceeds with such haste that it gets overdone (just like the euphoria when certain ill-advised acquisitions are made). Fortunately, when the large shareholders sell, they often come back because many large funds have a limited universe of choices. Large funds often cannot invest in smaller companies because there is not enough of those smaller companies to make a material difference.
Meanwhile, a company like AT&T usually has enough staying power to more than survive any perceived mistakes. The company has a lot of assets to draw upon. As long as management firmly focuses on shaping up the remaining businesses, then investors who happened to hang around until now have a very good chance to recoup their losses and probably more. It is part of the expectations of the debt ratings that this company has at the current time. AT&T Post Transaction Focus (Discovery and AT&T Merger Presentation May 2021.) Many times, there is a market reaction that the company treated the investor badly, so “why should I believe them now?” The main reason is that managements are not infallible so investors should definitely do their own independent research. But one error that really hurts is not a reason for management to continuously go wrong forever into the future. Instead, it is very likely that management is under pressure to be accurate and produce results after something as traumatic as a dividend cut to income investors.
The other thing is that large companies tend to move very slowly due to the sheer logistics of change. Mr. Market, on the other hand, wants results “yesterday”. Therefore, Mr. Market is likely to be very frustrated over the last several years first because of a perceived mistake or two followed by years of frustrating results. The good news for […]
source AT&T is a classical contrarian investment at this point.
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