Why AT&T Continues to Underperform the Dow

The Dow Jones Industrial Average is having another good day, but AT&T continues to sink after its deal with DirecTV.

May 21, 2014 at 3:34PM

The Dow Jones Industrial Average (DJINDICES:^DJI) is having a solid day, rising 0.9% near the end of the trading session after the Federal Reserve said it doesn't have a specific exit plan from its current monetary stimulus. Meeting minutes from the Fed's April meeting show that the Fed is considering how to tighten monetary policy without deciding on an exact plan yet. That gives flexibility and may indicate that low rates are here to stay for the foreseeable future.

While 28 of 30 Dow components were rising late in trading today, AT&T (NYSE:T) continues to be a laggard since it announced the acquisition of DIRECTV (NASDAQ:DTV).

AT&T's buyout of DIRECTV sinking its stock
Quietly, AT&T's stock has sunk rapidly since the company announced the DIRECTV buyout. This is notable because as AT&T's stock falls, it means more shares will go to DIRECTV shareholders to make up the $95 purchase price. There's a collar that adjusts shares given to DIRECTV shareholders in the buyout between $34.90 and $38.58. At the bottom end of the range, DIRECTV shareholders would get 1.905 shares in the deal, but that's the max they'll receive.  

T Chart

T data by YCharts.

The latest obstacle for the deal comes from DIRECTV's own shareholders, who are suing to block the merger, saying it undervalues the company. Eventually, the takeover will go to shareholders for approval, so this is a small bump in the road if anything, but it's grabbing headlines today.  

What's interesting is that AT&T's investors aren't terribly excited about the deal and are actually giving up more of the company as the stock sinks lower.

Of course, it'll likely be a year before the buyout takes place, and share prices can fluctuate wildly in that amount of time. DIRECTV also has to get its NFL Sunday Ticket deal done with the NFL to keep AT&T from having an out. AT&T's CFO recently said the agreement will be handled entirely by DIRECTV.

The ups and downs of buyouts can happen quickly, but at the end of the day, this merger makes sense for both sides. DIRECTV needs an owner who isn't tied to cable subscriptions and can expand streaming, while AT&T wants the added services, spectrum, and NFL Sunday Ticket.

Buy on the dip for the dividend
One of AT&T's biggest strengths is its dividend and the smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Travis Hoium manages an account that owns shares of AT&T.; The Motley Fool recommends DirecTV. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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