AT&T (T +0.04%) has been a frustrating stock to own for most investors. The telecom giant's debt-fueled expansion into the satellite TV and media markets, along with the sluggish growth of its wireless business, caused its stock price to decline more than 40% over the past five years.
But over the past year, a few green shoots appeared. AT&T gradually reduced its leverage by selling 30% of DirecTV, spinning off WarnerMedia through a merger with Discovery (DISCA +0.00%) (DISCK +0.00%), and divesting its other non-core assets to raise fresh cash. Its stock also briefly rallied last month as rising interest rates caused investors to favor value stocks again.
Image source: AT&T.
Between Jan. 1 and Jan. 18, AT&T's stock price rose 11% as the S&P 500 dipped 4%. However, AT&T subsequently gave up nearly all of those gains as three new red flags appeared on the horizon.
1. A spin-off instead of a split-off
At the beginning of the year, AT&T's investors weren't sure if the company would "spin off" or "split off" WarnerMedia when it merged with Discovery.
In a spin-off, AT&T would distribute about 1.7 billion shares of Warner Bros. Discovery to its investors. Each investor would receive 0.24 shares of the new media company for every share of AT&T they owned.
In a split-off, AT&T's investors would be allowed to directly trade none, all, or part of their AT&T shares for Warner Bros. Discovery shares. That exchange would likely retire about 20% of AT&T's outstanding shares, and amount to a massive buyback for AT&T's remaining investors. But to convince AT&T's investors to voluntarily make that trade, it would likely need to offer its Warner Bros. Discovery shares at a discount to their underlying value.
Many of AT&T's investors favored the split-off, because it was more flexible, it would reduce AT&T's outstanding shares, and they would get Warner Bros. Discovery shares at a more favorable price.
But on Feb. 1, AT&T CEO John Stankey confirmed the company would spin off its stake in Warner Bros. Discovery instead, saying that a spin-off was "simple, efficient, and results in AT&T shareholders owning shares of both companies." That decision, which was already hinted at during AT&T's fourth-quarter conference call on Jan. 26, weighed down the stock.
2. The dividend cut is finally here
AT&T also announced that it would reduce its annual dividend from $2.08 to $1.11 per share to reflect the divestment of WarnerMedia. That announcement wasn't surprising, since AT&T had previously told investors that it would reduce its cash dividend payout ratio after the spin off, but the reduction of its forward yield from 8.5% to 4.5% likely rattled some income investors.
The dividend cut could also prompt some investors to take a closer look at AT&T's rival Verizon (VZ 0.80%), which pays a higher forward yield of 4.8%, controls a larger slice of America's wireless market, and isn't juggling confusing divestments and spin-offs.
3. The unresolved FAA safety issues
In late December, the U.S. Federal Aviation Administration (FAA) warned that 5G C-band networks, which are mainly used by AT&T and Verizon, could interfere with aircraft navigation systems.
In early January, AT&T and Verizon both voluntarily turned off their 5G transmitters near airports and postponed their 5G expansion projects in nearby areas. On Jan. 28, the FAA, AT&T, and Verizon reached an agreement to turn on more 5G towers around airports, but only in certain areas that have been properly mapped.
These setbacks will likely be temporary, but it could give T-Mobile (TMUS 1.18%) -- which uses the mid-band (600 MHz to 2.5 GHz) spectrum instead of the high-band (3.7 GHz to 4.2 GHz) C-band spectrum -- an edge against its two rivals.
T-Mobile's usage of mid-band spectrums, which can penetrate buildings and solid objects more easily than high-band spectrums, already gave its 5G network a much wider coverage area than AT&T and Verizon. If additional safety concerns about C-band networks emerge in the future, AT&T and Verizon could both struggle to catch up to T-Mobile in the 5G race.
Should you still buy AT&T today?
If you already own AT&T, you should probably simply hold on to your shares because its low valuation, high dividend yield, and upcoming spin-off of Warner Bros. Discovery should limit its downside potential.
But investors who don't already own AT&T probably shouldn't buy this beaten-down stock just yet. There are plenty of other better blue-chip tech stocks to buy right now in this volatile and unforgiving market.
