Please ensure Javascript is enabled for purposes of website accessibility

Here's Why AT&T Stock Plunged Today

By Joe Tenebruso - Updated May 18, 2021 at 4:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors are bracing for a major cut to the telecom giant's dividend.

What happened

Shares of AT&T (T -1.91%) fell 5.8% on Tuesday as shareholders reacted to the likelihood of substantially reduced cash payouts from the media titan following the pending spinoff of its WarnerMedia business.

So what 

AT&T announced on Monday that it intends to merge its WarnerMedia assets with Discovery to create a new streaming-focused company. In return, AT&T stands to receive $43 billion, which it will use to reduce its sizable debt load. 

Analysts and investors applauded that part of the plan. What they didn't like, however, was the prospect of AT&T cutting its dividend nearly in half following the spinoff. 

A downwardly sloping stock chart.

AT&T's stock price sank on Tuesday. Image source: Getty Images.

AT&T said it would "resize" its dividend to account for the distribution of WarnerMedia to shareholders. Management anticipates that the company will pay out between 40% and 43% of its forecast annual free cash flow of $20 billion. That would place its post-spinoff dividend at roughly $8 billion per year, compared to the $15 billion it distributed in 2020. 

Now what

Skeptics have long questioned whether AT&T could continue to support such a high dividend, particularly after its debt load exploded to more than $180 billion following its acquisition of Time Warner in 2018. These concerns were reflected in AT&T's dividend yield of over 7%, which is well above rival telecom titan Verizon's 4.4% yield. When a company sports a significantly higher dividend yield than its industry peers, that can indicate that investors are worried that it may eventually need to cut its payout, and pricing the stock accordingly. In this case, it appears the skeptics were correct.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends Discovery (C shares) and Verizon Communications. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
$18.00 (-1.91%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.