What happened
Shares of AT&T (T -1.34%) fell on Tuesday after the telecom titan said it would cut its cash payout to shareholders following the planned spinoff of its WarnerMedia business.
As of 2:40 p.m. ET, AT&T's stock price was down more than 4%.
So what
AT&T will merge its media operations, including its fast-growing HBO Max streaming service, with Discovery (DISCA) (DISC.B) (DISCK). The $43 billion transaction will create a powerful competitor to Netflix and Disney in the streaming arena.
Investors will receive 0.24 shares of the new company, which will be called Warner Bros. Discovery, for each share of AT&T they own. The transaction is projected to close in the second quarter.
AT&T is separating its media and communications businesses. Image source: Getty Images.
Post-closing, AT&T intends to pay an annual dividend of $1.11 per share, down from its current payment of $2.08. The reduced payout will represent roughly 40% of AT&T's forecasted free cash flow once the deal is completed.
Now what
The spinoff is an acknowledgment that AT&T's $85 billion purchase of Time Warner in 2018 has failed to deliver the profit growth management expected at the time. Yet the deal will help to make AT&T a more streamlined company.
Freed from the need to invest aggressively in content in a desperate attempt to wrestle away streaming market share from the likes of Netflix and Disney, AT&T will be able to focus its efforts on the buildout of its new 5G wireless network. It will also be able to pay down debt at a faster clip.
Many investors, particularly those who have come to rely on AT&T's stock for income, will no doubt find the dividend cut painful. However, the dividend reduction could help to boost AT&T's growth prospects and strengthen its balance sheet, thereby making it a stronger business for the long term.
