Shares of AT&T (T 1.15%) are down roughly 4% since the wireless leader said it plans to cut its cash payout to investors nearly in half.
Is the decline in the popular dividend-stock's performance a harbinger of more pain ahead for shareholders? Or is the worst now behind AT&T?
In years past, AT&T got caught up in a spate of empire building. It used the abundant free cash flow generated by its core communications business to fund an acquisition spree. Unfortunately, for shareholders, AT&T's $67 billion purchase of DirecTV in 2015 and $109 billion purchase of Time Warner in 2018 didn't deliver the profit growth management had promised.
AT&T went on to spin off its DirecTV and other video operations in 2021 in a deal valued at roughly $16 billion. And on Tuesday, AT&T announced its intentions to spin off its WarnerMedia assets in a transaction valued at $43 billion.
The value destroyed by these ill-fated acquisitions and subsequent divestitures has taken a heavy toll on AT&T's stock price. Shareholders have received a return, including dividends, of approximately 5% since AT&T announced its plans to buy DirecTV on May 18, 2014. That compares to a total return of more than 180% for the S&P 500.
That said, AT&T may have finally learned its lesson. The company is being forced to cut its once sacrosanct dividend by 47% following the spinoff of WarnerMedia. That's a painful pill to swallow for management and shareholders alike.
However, if AT&T can show a commitment to maximizing future cash flow by refocusing its business on its core wireless operations, the stock could become attractive, once again, to income-focused investors. Even after the dividend cut, AT&T's shares would yield more than 4.5% at current prices and more than 6% when adjusting for the stock shareholders would receive in the new media company created by the spinoff. That would still be one of the highest dividend yields in the S&P 500.
Rather than selling the stock at its lows, investors may be better served by holding on to their AT&T shares.