Controversy where there is none
I did not expect the anger and frustration when I wrote about AT&T (NYSE:T) and Warner Bros. Discovery (WBD) in Dumping The Dog. So, let’s clear the air.
T’s dividend has been cut by a whopping 47%. And, equally bad, the spinoffs and underlying capital have eroded. So AT&T’s actual real-world revenue has shrunk and investors are far worse off than they were before the fallout.
The thing is, there was never a good time to sell T once we found out WBD was going their separate ways. If you were to sell immediately, you would be down since the price of T has already been suppressed by the market. And, if you held, your dividend was reduced and you got WBD. Since WBD went down, you lost money. In other words, your dividend income is down and your capital has eroded.
I don’t know why it’s controversial. The facts are the facts. In this article, we will look at some of the numbers to make it as clear as possible. I also want to make it absolutely clear that I still hold both T and WBD.
Follow the news and math
On May 17, 2021, we got the news for the first time.
Under the terms of the agreement, which is structured as an all-stock transaction, Reverse Morris Trust, AT&T would receive $43 billion (subject to adjustment) in a combination of cash, debt and retention. by WarnerMedia of certain debts, and AT&T shareholders would receive shares representing 71% of the new company; Discovery shareholders would own 29% of the new company. The AT&T and Discovery boards of directors have approved the transaction.
And here is what has happened to the price of T since that time:
The graph is a little wobbly due to the stock’s revaluation at the start of the year. I love YCharts, but sometimes it shakes the charts a bit. Therefore, I strongly encourage readers to simply scroll through the price action here on Seeking Alpha to see how the price action from May 17, 2021 through today.
Or, for another quick look, here’s what investors did for a month after the announcement (work from the bottom up):
The price has gone down. The volume has increased. And T did not recover. There was a sale from the start. These are the facts. Maybe I’m wrong and I’m missing something, but there was never a time when T recovered, rising above $30. It was on the back of decline before the announcement.
It seems investors knew the deal was bad. For a year, nothing good has happened with T. Moreover, although it is only in its infancy, WBD has not improved the situation. Of course, the whole market was hammered. But it’s still factual that in the year since the announcement, long-term investors have taken a hit in both their dividend income and their capital.
Again, there is little controversy in my mind. Price action (i.e. capital) and dividend flow are down. It’s when you look great, for a full year. So for the naysayers, who say I’m thinking short-term, a year back is instructive.
Now, all that said, investing is about the future. Because of this, I held my T shares, collected the dividends, and survived the spin-off. And, again, I will point out that I still hold both T and WBD. I am, indeed, turned towards the future.
“Yes, but all stocks are down…”
I have heard this several times. My own overall portfolio is down about 5%, so despite having a small pile of growth names, my biggest pile is in oil, gas, tobacco, communications, healthcare , etc. So, I’m doing pretty well.
Also, for fun, let’s look at some comparable actions for T and WBD. I think it’s good to level the playing field. Let’s start with April 8, 2022, since that’s when the spin-off was completed.
It’s good news. And that’s one of the reasons why I kept my T shares. I have faith in the core business, which is what’s left now, of course. I see T-Mobile (TMUS) down a bit, but Verizon (VZ) down a lot in just one month.
That said, and for the record, I didn’t add to my T holdings, but added a pinch to VZ. It is a question of evaluation. I also like the VZ dividend.
And now, how about WBD?
In terms of price, WBD is down more than Paramount (PARA) and Disney (DIS), but Netflix (NFLX) is really suffering.
I don’t see too much here, between WBD, PARA and DIS. Although it makes me think that the market sees them as being more similar, and NFLX is more of an outlier. WBD, PARA, and DIS are a little more “old school” in terms of content, assets, and distribution channels (e.g. TV and movie theaters). NFLX is more of a pure streaming game. This is what I believe the market sees.
However, let’s be clear about the NFLX situation. Their actual growth has been totally hammered from April:
Netflix’s struggle to grow subscribers took a disastrous turn in the first quarter of 2022. The company reported a loss of 200,000 subscribers worldwide from the fourth quarter, and it expects even bigger losses to come. . Netflix estimates it could lose up to 2 million subscribers in the second quarter.
“Our revenue growth has slowed significantly,” Netflix acknowledged in its shareholder letter. “Covid clouded the picture by significantly increasing our growth in 2020, leading us to believe that most of our growth slowdown in 2021 was due to Covid’s push forward.” Netflix ended the quarter with around 222 million subscribers, so it’s still the biggest streamer – but it faces a host of challenges.
In the meantime, what about PARA?
Paramount Global added 6.3 million global streaming subscribers in the first quarter to surpass the 62 million mark at the end of March, up from more than 56 million at the end of 2021.
And for DIS?
Disney once again exceeded Wall Street expectations last quarter for streaming, adding 7.9 million Disney+ subscribers and suggesting the company could be positioned to take the lead in what has become a hot race. to the top of streaming.
Finally, here are recent reports from WBD:
Warner Bros. Discovery said it added 2 million Discovery-related streaming subscribers during the quarter, for a total of 24 million. This corresponds to the 2 million added in the fourth quarter.
Last week, AT&T said HBO and HBO Max had 76.8 million subscribers at the end of the first quarter of 2022.
Adding it all up and largely ignoring the financials, it’s clear that WBD, DIS and PARA have been rewarded for their growth. Of course, that also means NFLX didn’t escape punishment. The story is clear here. WBD and all of its peers are down because all of the growth titles and all of the streamers are down, while NFLX is down badly due to a true drop in subscribers. Ouch!
I have to re-emphasize that I’m not down on T and I’m not down on WBD. On the contrary, as I have already said:
From there, AT&T is likely on hold. On a personal level, I certainly don’t sell. While I’m not happy with the dividend cut, I like T’s increased focus on core business. It is also possible to control the prices and to relax them a little, or even to increase the prices of certain packages. There may even be some growth and dividend acceleration, although I’ll believe it when I see it.
I also like many parts of WBD and there is room for growth and more. To put some color around this:
Right there we have a list of good news about the future of WBD. I also know that WBD is no small potato and has a chance of being one of the last men standing if there is consolidation down the road. And, hey, if they were taken over by Apple (AAPL) or Amazon (AMZN) for example, there would almost certainly be a huge premium for WBD’s quality assets.
So, one last time here. I do not buy or sell T or WBD. I’m holding. I’m patiently waiting to see how it all pans out. But I also want to go back to the original Dumping The Dog article. The math says I’m right and at this point my dividends are down in absolute terms and my capital has gone down. The WBD spin-off hasn’t — yet! – turned out to be magic, so I’m a bit frustrated, and still in wait-and-see mode with both companies.
I think I’ve shown that I have a longer view of T. And that I’m patient, but frustrated for good reason. In the long run, everything will probably work out pretty well for investors.