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Why AT&T Tumbled in 2021, but Is Rebounding in 2022

By Rich Duprey – Jan 6, 2022 at 9:24AM

Key Points

  • The spinoff of AT&T's media assets has weighed on the telecom's stock.
  • Ma Bell's cutting its dividend in half as a result of the deal did not sit well with income investors.
  • A smaller, more narrowly focused stock is much better for investors -- which the market may be beginning to realize.

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The telecom giant might find itself free a lot sooner than it previously thought.

What happened

Despite AT&T's (T 0.32%) merger with TimeWarner in 2018 being blamed for holding the telecom giant back over the years, the market hasn't exactly rewarded Ma Bell's decision to shed its WarnerMedia division and merge it with Discovery (DISCA) (DISCK).

According to data provided by S&P Global Market Intelligence, AT&T stock lost 14.5% of its value in 2021, very likely because in addition to getting rid of its media business, AT&T is also slashing its dividend in half.

A person holds a coaxial cable between a pair of scissors.

Image source: Getty Images.

So what

The telecom behemoth is still considered a widow-and-orphan stock by many investors, which means it's a low-risk stock that pays a high dividend, but its position as a Dividend Aristocrat, or a company that has raised its shareholder payout every year for 25 years or more, is coming to an end.

Yet it seems the market ignored the very real benefits that will accrue to AT&T from the split. The TimeWarner acquisition saddled the telecom with a mountain of debt, and the spinoff is expected to net it some $43 billion, which will go a long way to paying down its debt load.

Moreover, the new company that will be created by the spinoff will be a media powerhouse in its own right. CEO John Stankey recently revealed that HBO and HBO Max ended 2021 with 73.8 million subscribers, well ahead of what AT&T was targeting for the year, and he anticipates 2022 will be even better.

While that's not on the same level as Walt Disney's streaming service or Netflix, it indicates it is a valuable property nonetheless and will have no problem going head-to-head against its rivals. Stankey has previously said he believes its video services could have as many as 400 million subscribers.

Furthermore, once the split happens, AT&T will be able to focus its resources on growing its 5G network that it is already investing hundreds of millions of dollars in and will be spending more on in the future.

Customers looking at smartphones.

Image source: AT&T.

Now what

AT&T and Discovery already received European Union regulatory approval for the spinoff and merger and are now awaiting word from U.S. antitrust regulators. Stankey is now thinking the deal will get the green light earlier than the prior mid-2022 target date because the review process by the Justice Department has been going smoothly.

And the renewed attention to AT&T's telecom business will be welcome as it gives it a clearer strategy for improving cash flows. The spinoff should free up billions in excess cash that could eventually be returned to shareholders, either as stock buybacks or even future dividend increases.

Wall Street already expects AT&T's payout to reach parity again with the current dividend by the middle of the decade, and because it yields around 8% annually today, even the halved dividend will still be a lucrative salve to investors.

Indeed. So far in 2022, AT&T is bounding 6.5% higher.

Rich Duprey owns AT&T. The Motley Fool owns and recommends Netflix and Walt Disney. The Motley Fool recommends Discovery (C shares). The Motley Fool has a disclosure policy.

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