A Blue Chip name is poised to offer a 6% return

To be perfectly honest, few marketers get excited about AT&T (J) – Get the AT&T Inc. report. stock, and for good reason.

The company’s stock has been an eternal dog, amid ill-advised acquisitions, broken promises from management and fierce competition.

“The only redeeming quality of owning T has been the intoxicating dividend yield,” recently wrote real-money columnist Brad Ginesin. “Even so, the stock manages to lose nearly the equivalent of the dividend payout each year, so holding the stock seems pointless.”

But things could change for the telecoms giant following a recent investor day as “the opportunity looks too attractive at the current price before the Discovery (DISCA) – Get the Class A report from Discovery, Inc. closing of the case,” added Ginesin.

Here is an overview of the terms of the AT&T/Discovery agreement.

AT&T is set to spin off Warner Bros. from Discovery shareholders, which is expected to happen in mid-April. The transaction will give T shareholders 0.24 of a share of the new Warner Bros. Discovery (with all current Discovery shares included) for each share of T.

“The value that T gets is extrapolated from the current value of DISCA, 71% of a $62 billion company, so at the current price of DISCA of about $26, holders of T have about $6/ share worth Warner Bros Discovery,” Ginesin said. “Subtracting that from the T stock price of approximately $23, the remaining $17 will encompass new AT&T stock. As part of the Warner Bros. spinoff, AT&T will transfer over $40 billion of debt to the new Warner Discovery Bros.

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There’s more to the deal.

With T at the equivalent of $17 post-trade, the stock will be among the cheapest in the S&P 500, but the company is providing a much-needed service with a growing business producing strong cash flow.

“The new AT&T will be a $120 billion market capitalization company, growing in low single digits, earning about $2.30 per share this year and $20 billion in cash flow expected in 2023,” he said. noted Ginesin. “The 40% dividend payout ratio will yield over 6%.”

Pro forma shares of T have a P/E of 7 and a double-digit free cash flow yield – metrics that provide the stock with limited downside and plenty of upside as Wall Street gets comfortable with AT&T more focused, less complex and indebted. “Management sees potential for share buybacks after the surge in capital spending peaked in 2023 and net debt declined to $110 billion,” Ginesin said.

Wall Street is taking a wait-and-see attitude ahead of the deal to decipher how AT&T and Warner Bros. Discovery will trade post-deal, perhaps missing the opportunity to own DISCA at a reasonable valuation and T at a bargain price.

“At AT&T’s Investor Day, management presented a credible plan for organic growth and cost reductions that will help support strong earnings and free cash flow assumptions,” Ginesin added. “Any appreciation on Wall Street for AT&T’s steady and growing cash flow will translate into a much higher share price.”

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