The spinoff
In February, AT&T announced that it would spin off WarnerMedia in a $43 billion deal to merge its media assets with Discovery (DISCA).
AT&T shareholders would own 71% of the new Warner-Discovery company, receiving 0.24 Warner-Discovery shares for every AT&T share they own.
Management also said that it would pay a post-close annual dividend of $1.11 per share, down from the $2.08 per share it currently distributes.
Flannery points out that the new Warner-Discovery shares are currently worth about $6.75 per AT&T share, implying that the remaining AT&T business is valued at $16.78 per share at the moment. So the new dividend payout — while lower than before — will lead to a pro-forma yield of 6.6%, making the remaining AT&T company one of the highest yielders in the S&P 500.
The transaction is expected to close in Q2 of 2022.
Flannery sees the stock reacting to this transaction in three possible ways.
Contemporary art has outperformed the S&P 500 by 131% for the past 26 years. Join the exclusive platform to invest in million-dollar works by artists like Banksy, Basquiat, and more. Get started today and diversify your portfolio with art.
Learn MoreThe upside
In the upside scenario, investors quickly gain confidence in the sustainability of AT&T’s revenue growth and free cash flow/leverage outlook, propelling the stock higher on a positive “re-rating.”
Morgan Stanley assigns a 20% possibility to this outcome, where the remaining AT&T business would command a stock price of $20 (post-spinoff), implying upside of about 14%.
The midline
Flannery’s second scenario focuses on the removal of reluctance.
Some investors might be unsure about buying AT&T shares today because they don’t want to own the new Warner-Discovery company. Income-seeking investors, for example, may only want exposure to the remaining fat-dividend-paying AT&T.
But once the transaction is complete — and management updates their outlook — we could see incremental buying from investors who were previously standing on the sidelines.
Flannery thinks the post-spinoff AT&T would trade at $18.50 per share in this midline scenario, implying roughly 7% worth of upside. He pegs this possibility at 50%.
Acorns rounds your everyday purchases to the nearest dollar and invests your spare change. That means any spare change from your daily spending – gas, coffee or groceries – will go towards building your wealth. Get up to $20 when you sign up with this special link.
Get StartedThe downside
In the least bullish scenario, Flannery sees investors underwhelmed by the transaction and doubtful about whether AT&T can achieve its targets on deleveraging and free cash flow. Increasingly intense competition in the wireless space would also weigh on investor sentiment.
In such a scenario — Flannery gives it a 30% likelihood of happening — he sees the post-spinoff AT&T fetching a price of $16.25 per share, implying a downside of 2%.
The bottom line
Morgan Stanley isn’t the only firm with a bullish outlook on AT&T.
Barclays has maintained an overweight rating on the shares with a price target of $28 — the same as Morgan Stanley’s. UBS has a buy rating on AT&T and a price target of $32, roughly 32% above current levels.
Of course, the overall stock market is having difficulty finding upward momentum at the moment. Both the S&P 500 and the Nasdaq are in correction territory, down 12% and 18%, respectively, in 2022.
Proceed with caution.
Sign up for our Moneywise newsletter to receive a steady flow of actionable ideas from Wall Street's top firms.
More from Moneywise
- 4 ways to earn big returns in 2022 without the shaky stock market
- Jim Rogers: Next bear market will be ‘worst in my lifetime’ — he'll rely on 3 assets
- Robert Kiyosaki says we're already in a 'technical depression' — he's using these 3 assets for protection
Sponsored
Meet Your Retirement Goals Effortlessly
The road to retirement may seem long, but with WiserAdvisor, you can find a trusted partner to guide you every step of the way
Wiseradvisor matches you with vetted financial advisors that offer personalized advice to help you to make the right choices, invest wisely, and secure the retirement you've always dreamed of. Start planning early, and get your retirement mapped out today.
