After AT&T (NYSE: T) successfully won its case against the government to buy Time Warner (NYSE: TWX), income investors needed to decide on what to do next. The telecom giant pays shareholders a lofty 6% dividend yield but it also took on plenty of extra debt. AT&T shareholders are also getting diluted as the company absorbs Time Warner.
AT&T needs Time Warner, now called WarnerMedia, to remain relevant. It may no longer supply the back-end data network for smartphones and the Internet. It needs to sell content, too. Netflix’s business model of growing subscriptions and buying up content validates the value of great content. Already, AT&T’s management’s renaming of the unit is a good first step because the Time Warner’s name is out of date.
Financial Considerations
Paying off Time Warner will take four years. While this sounds like an enormous undertaking, the post-merged company makes plenty of cash flow to fund the interest payments. Operating cost cuts, which are mainly in back-end office redundancies, should lead to better profit margin.
Still, the heavy debt will weigh on the stock and limit any upside for at least a few quarters. Interest rate hikes are already hurting telecom stocks. But after four rate hikes this year and more next year, the end of monetary tightening in the interest rate cycle will bring more investors buying AT&T stock again.
