AT&T Merger Affects Stock Stability

insider buy-to-sell ratio

Well, that was terrible. Awful. What the heck? I’m OUT! For two years, AT&T Corp. (NYSE:T) had been a fascinating investment opportunity. Shares traded right around $30. Hedge funds were lining up left and right to take a chunk of the stock. There were grand DELUSIONS that this giant tank of a company was worth $50… $60… even $65 as a sum of the parts investment. But years of mismanagement had doomed the firm. And yesterday, that total negligence was on complete display. Let me explain.

Why Do This to Yourself?

Last year, AT&T stock fell so low that its dividend hit roughly 8%. I don’t know about you, but I was buying that all day. I was willing to forgive its corporate team for its ill-advised purchase of DirecTV back in 2015. That deal was so awful that they lost $32 billion on paper (DirecTV is now worth a third of what AT&T paid).

It bought DirecTV – a satellite television provider – at a time that Netflix was gaining tens of millions of new subscribers a year. That’d be like buying a horse farm five years after Henry Ford opened his first automotive plant.

Now chasing Netflix (NASDAQ:NFLX) and other streaming giants, AT&T dug deep into its debt capacity and bought up Warner Media, a legacy giant that AOL once purchased in what is known as the worst merger of the last two decades. That deal gave AT&T hot properties like HBO and Showtime. But it also required about $85 billion, largely financed by corporate bonds.

Analysis of Yet Another AT&T Merger

Yesterday, it announced it would spinoff Warner Media in a deal with Discovery Communications (NASDAQ:DISCA). This would create a massive media giant that now includes TBS, TNT, CNN, HGTV, Golf Channel, and much more. At first, Wall Street LOVED this idea. After all, AT&T shareholders would receive 71% of the new company. They would receive $43 billion in cash. Sounds GREAT on the surface.

But then the reality kicked in. This new entity will start with $55 billion in debt. It adds ZERO value to the market in any way. And worst of all? AT&T – which had once raised its dividend 25 straight years – is now going to need to slash its dividend. The company had set aside $26 billion per year in cash flow to pay dividends.

Now, it must slash that number. It will only pay about $20 billion. That means the company’s attractive 6.5% dividend is about to fall. How far? It could plunge to 4% in the coming months.

I’m off-board. Even if the company is now going to focus on 5G and fiber-optic strategies, I believe that there are better options in the space. That starts with Verizon (NYSE:VZ), which is a major competitor, and a Warren Buffett holding. I’m out on AT&T. I don’t recommend that investors chase this lower.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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