A New Dividend Growth Star is Born

Dividend Investing, Income Investing
by Tim Plaehn
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Scattered 100-dollar bills wrapped in the American flag.

Last week, AT&T (T) spun off Warner Media. Now, I’ve recommended AT&T in my The Dividend Hunter service since November 2020. The dividends since then have been great.

But now that the spin-off is done, it’s time to evaluate the prospects of both companies. My subscribers are ready for some share price appreciation to counter the price decline that started when the spin-off was announced. I think the prospects of that outcome are excellent.

Here’s why…

With the spin-off, AT&T shareholders received 0.24 shares of the newly merged Warner Brothers Discovery (WBD) for each share of AT&T. For example, if you own 500 shares of T, you now also have 120 shares of WBD. Your 500 shares of T currently trade at a lower price, to offset the value of your new WBD shares.

AT&T traded for about $24 just before the spin-off. Now, a couple of days after the transaction, the total value for an investor is equivalent to $25.80 per share. If you were a pre-spin AT&T shareholder, things are off to a good start. Let’s look at the potential for each of these stocks.

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WBD currently trades for $26.63, and Wall Street Analysts are very optimistic about it. According to Seeking Alpha, “Analysts looking at the new Warner Brothers Discovery have coalesced around a $40 price target, implying a hefty 66% upside. Deutsche Bank has made the new stock its top pick in Media, saying it’s one of the best-positioned companies in global streaming.”

I don’t track non-dividend-paying stocks, but it looks like there is some significant upside potential for the shares of the new media giant.

I also think AT&T shares have significant upside potential. The new dividend rate is $1.11 per share, or $0.2775 per quarter. With T at $19.45, the shares yield 5.7%. With a bunch of debt unloaded to WBD, I expect that AT&T will get back to moderate dividend growth, something in the low single digits.

For comparison – and it is now a pretty valid one – Verizon Communications (VZ) yields 4.7%. Verizon has grown its dividend by 2.5% per year.

So, we have comparable companies with comparable dividend growth, yet one yields a full percent more than the other. Because of this, I think AT&T’s yield can drop to around 5%, which would mean a share price of more than $22.

From this quick and dirty analysis, it appears that both Warner Brothers Discovery and AT&T have significant upside potential over the next couple of quarters. I will be guiding my Dividend Hunter subscribers in the May issue of the Dividend Hunter newsletter accordingly.To make sure you get that analysis as soon as it comes out, you need to be a member. Click here to learn how to sign up today.

Author: Tim PlaehnTim is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory focused on creating a high-yield income stream and it's companion service The Dividend Hunter Insiders, Weekly Income Accelerator, a covered call trading service, and for investors looking for long-term total returns from their income investments using stocks with ever-growing dividend payments, he offers Monthly Dividend Multiplier. He co-edits POWR Income with Jay Soloff. Prior to his work with Investors Alley, Tim was a stock broker, a Certified Financial Planner, and F-16 Fighter pilot and instructor with the United States Air Force. During his time in the service he was stationed at various military locations in the U.S., Europe, and Asia. Tim graduated from the United States Air Force Academy with a degree in mathematics. In his free time he tours the United States parks, campgrounds, and wilderness areas in his travel trailer.
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