As we all have heard the AT&T (T) news that dropped on May 17th, AT&T is spinning off WarnerMedia to merge with Discovery, to create a massive organization in Entertainment.

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The stock market instantly loved it, for only a few hours.  The stock price has shuttered due to the devastating dividend news of AT&T having to reduce their dividend?  In this article, I will list out the options I, and many of us, have on the table.  The question has consistently been, do you sell your AT&T stock, now?

AT&T and the WarnerMedia, Discovery Entity

The deal, combines the WarnerMedia division of AT&T, which includes HBO Max, TNT, TBS, WB, CNN, Cartoon Network and DC to name a few; with Discovery Plus.  What does Discovery Plus include?  Discovery includes the Food Network, HGTV, TLC, History and Lifetime.  This is one content heavy and media producing company.

This is a $43B deal, with AT&T receiving $43B.  The $43B is going to be composed of cash, debt securities in the new entity and retention of AT&T’s.  This will absolutely reduce AT&T’s debt and interest payments.

Then, AT&T Shareholders will receive 71% of the combined entity, with Discovery’s (DISCA) shareholders receiving 29%.  This shall be interesting.  This should close in mid-2022 and the new entity is expected to have $53B in revenue with $14B in adjusted EBITDA.

Now, then there was the not so great news for dividend growth investors and that has to do with AT&T (T) and their dividend, of course.  We have all heard and read the news…

AT&T’s Dividend Cut or Dividend Reduction

I know AT&T shareholders were curious what the dividend payout will be.  AT&T plans to have expected free cash flow (FCF) of around $20B and they want the payout ratio, based on FCF, to be at 40-43% or around $8B on over 200 million shares outstanding.

Currently, AT&T uses around $15B of cash flow on their dividend.  Therefore, this is reduced by ~47%.  AT&T currently pays $2.08 per year and one could/should anticipate, come next year, summer time, the annual dividend will be somewhere around $1.08 to $1.12, but more than likely $1.10/$1.11.

I (Lanny) own 263 shares, so for the dividend to be reduced by $0.98, that’s a HUGE impact on my forward income, to the tune of ~$260 or almost $22 per month in dividends.

Granted, you’ll get shares in the new company.  How many?  What will their market cap really be?  A few articles valued the company at $130 billion, we shall see.

Therefore, as an AT&T and dividend growth investor, what is one to do?  Heck, AT&T used to be on our Top 5 Foundation Dividend Stocks!  There are a few options.

AT&T Stock Avenues to Take

First, I can hold and be okay with the AT&T stock in my portfolio.  The dividend will be down by 45-47% and I can continue to reinvest the AT&T shares each and every quarter going forward.  I can reinvest the shares at the $29-$30 price point it’s been at to end the week, which would equate to more shares with the merged entity at the close date.

Second, I can completely sell my AT&T stock position.  I can eliminate my position, which would be approximately $8,000 before taxes.  I then would have to deploy the capital elsewhere, such as Verizon (VZ); whom has been on my dividend stock list.

Third, I could reduce my position, say to 200 shares, and take off around $2,000 worth to re-deploy the capital elsewhere.  Heck, I could even redeploy into my Vanguard (VYM) position. This would bolster VYM, to which VYM has DIVIDEND GROWTH, which we know is critical in this financial freedom journey.  The impact here could be a net reduction in the immediate term, but with anticipated growth each year with VYM.

Lastly, to go back to the first idea with holding the AT&T stock, I could technically STOP the Dividend Reinvestment.  The quarterly dividend I receive from AT&T in my taxable account stands at $136.76 right now.  Therefore, conservatively, I could continue to use the proceeds and reinvest elsewhere.  That could amount to $500 to invest into another undervalued dividend growth stock over the next 12 months.  Tough decisions for a dividend investor.

Luckily, AT&T only represents 2% of my taxable brokerage account and doesn’t impact the value or income in a material way, as the income is less than 5%, as well.  That helps in my decision process, as I couldn’t imagine what it would be like if they were 10-50% of my portfolio, definitely would have to make drastic moves, no doubt.

I am actually okay with management’s decision here, cleaning up what AT&T wants to focus on – wireless and broadband.  There was no way to continue deploying significant amounts of capital to battle Netflix (NFLX) and Disney+ (DIS) in streaming.  Content requires significant capital, year in and year out, and so does the battle of 5G and even the next generation of technology after that.

Therefore, is AT&T a better company, taking the dividend out of it?  Sure, it appears so.  Is this great for dividend investors?  Short answer, no – not in the short run.  It may take 10-13 years for the dividend to grow at an average rate of 3-5% with the yield being between 3.5%-5.% to catch up to where it currently is for AT&T.  That is, with an expected dividend of $1.10 per share starting next summer, at a price of $25-$30.

AT&T Stock Conclusion

Fortunately, I do not have to make a decision right now.  I would love to read more about the new merged entity, the value that could bring.

The time is ticking.  As of right now, from the 4 options listed above, today, I rank my options in this order: 4, 1, 3, 2.  That is purely due to not having all of the information needed to make a sound decision.

The stock price has stayed volatile, as well.  First, AT&T’s stock price had shot right up to almost $34 and by the next day was as low as the mid-$28’s.  At May 20th’s close, AT&T popped back up close to $30 per share.  Therefore, there is still a lot to be said and information to be received.