AT&T Plans Dividend Cut From $43 Billion Discovery Media Merger

AT&T will exit the list of so-called 'dividend aristocrats' amid plans to lower its payout by as much as $7 billion in the wake of its media asset merger with Discovery.
By Martin Baccardax , |

AT&T  (T) - Get Report will cut it payout ratio by more than 20 percentage points in the wake of its media asset merger with Discovery  (DISCA) - Get Report, the company indicated Monday, crashing out of the list of so-called 'dividend aristocrats.'

AT&T said its dividend payout ratio, which was around 63% in the previous quarter, will be "re-sized" to account for the distribution of WarnerMedia assets into a new company. The remaining AT&T assets will aim to give shareholders a dividend payout ratio of between 40% and 43%, the company said, based on anticipated free cash flow of around $20 billion.

The informal list of dividend aristocrats, which includes AT&T, is comprised of companies that have increased their base dividend payout  for each of the past 25 years.

"I think the new Discovery is going to be great, but that's not why peopled owned AT&T stock," TheStreet founder Jim Cramer told CNBC's Squawk On The Street program Monday. "Does this deal give the AT&T shareholder the equivalent of a good dividend, because if you're targeting a payout ratio of of between 40 and 43 percent (of anticipated cash flow), well, that's a dividend cut from $15 billion to $8 billion."

"Four weeks ago, I heard the stock was a great dividend play, and that the assets worked well together," Cramer added. "I think this deal throws (former CEO Randall) Stephenson under the bus."

AT&T shares were marked 1% higher in early mid-day trading Monday, paring earlier gains of as much as 5%, to change hands at $33.56 each. Discovery shares, meanwhile, slumped 4.4% lower to $34.20 each after surging as much as 18% in pre-market trading.

AT&T will take $43 billion in cash and securities in exchange for its WarnerMedia division, which include one of Hollywood's top studios as well as the streaming giant HBO Max, with Discovery's stable of unscripted programs and channels such as "90 Day Fiance" and the Food Network.

As part of the 'Reverse Morris Trust' agreement structure, AT&T shareholders will own 71% of the combined group, the companies said, which will likely generate $52 billion in 2023 revenues and a combined subscriber base of nearly 150 million.

Prior to the Discovery deal, AT&T paid an annual dividend of $2.08 per share, pegging the stock's dividend yield at 6.45%. 

"AT&T shareholders will retain their stake in our leading communications company that comes with an attractive dividend," said AT&T CEO John Stankey. "Plus, they will get a stake in the new company, a global media leader that can build one of the top streaming platforms in the world."