Dividend Cuts and Suspensions: Who's Paring Back?

AT&T

• Market value: $205.5 billion
• Action: Dividend decrease
• Annual dividend prior to change: $2.08 per share*

Big changes are coming to AT&T (T, $28.78) in 2022.

On May 17, the telecom giant announced that it was spinning off WarnerMedia – which it acquired in June 2018 for $85 billion – and merging it with Discovery Communications (DISCA), the company behind cable networks such as HGTV, Animal Planet, and the Food Network.

Together with HBO, CNN, TBS, the Warner Bros. movie studio and other media properties, the combined entity will have the scale necessary to compete with Netflix (NFLX), Disney (DIS) and the rest of the entertainment industry's behemoths.

AT&T will receive $43 billion in cash, debt securities and the assumption of some of WarnerMedia's debt by Warner Bros. Discovery, the new name of the combined entity. AT&T and its shareholders will own 71% of Warner Bros. Discovery.

However, dividend investors won't be getting the same payout they've become accustomed to once the combination is completed in mid-2022.

According to AT&T CFO Pascal Desroches' June 15 update to shareholders, the company will pay out between $8 billion to $9 billion annually for dividends. That's approximately 40-43% of the $20 billion or more in free cash flow it expects to generate once WarnerMedia's been spun off.

In the first quarter ended March 31, AT&T paid out $3.83 billion in dividends. That's $15.32 billion on an annualized basis. Based on the midpoint of the company's dividend payout guidance post-closing, AT&T will reduce its dividend by 45% to an estimated $1.19 per share.

The cut won't take place until the transaction is completed. The good news is that it plans to invest the savings in 5G and its fiber network, increasing its annual capital investment to $24 billion.

Analysts are mixed about the move.

"Everybody recognizes that [AT&T] is a lumbering old giant with slower growth prospects and a lot of debt. So, I think they've done this transaction in an attempt to change the perception of the company to something with some more growth characteristics," Baskin Wealth Management president David Baskin told the Cantech Letter in early June.

* The cut has not occurred yet. This is based on an AT&T projection.

Antero Midstream

• Market value: $5.0 billion
• Action: Dividend decrease
• Annual dividend prior to change: $1.23 per share

Antero Midstream (AM, $10.39) gave investors a jolt in mid-February when it slashed its dividend 27% in order to allocate more capital to infrastructure investments.

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The operator of pipelines and storage facilities for natural gas, liquid natural gas, and water handling and treatment, slashed its annual payout to 90 cents a share from $1.23 a share.

The move allows AM to boost capital expenditures by about $65 million, notes Raymond James analyst J.R. Weston, who rates the stock at Market Perform (the equivalent of Hold).

"While we've previously cautioned of the AM financial model attempting to 'thread the needle,' and the stock has persistently traded with a double digit dividend yield, we still expect the dividend cut will surprise some investors," Weston said in a note to clients.

UBS analyst Shneur Gershuni, who rates the stock at Neutral (Hold), largely agrees with Weston's take on events.

"While AM's headline dividend cut supports future near term volume growth, lowers leverage and creates a fresh cash flow entity, the optics of cutting to raise capex was not well received by investors," Gershuni writes.

Shares in Antero Midstream plunged more than 12% after the Feb. 18 disclosure, which is typical after stocks announce dividend cuts. However, it managed to reclaim the lost ground in a matter of weeks. And even after a bout of recent weakness, AM is up more than 35% for the year-to-date through the end of June, beating the S&P 500 by more than 20 percentage points.

At 90 cents per share annually, AM's dividend yield based on the June 30 closing stock price comes to 8.7%.

Analysts' consensus recommendation on AM stock stands at Hold, according to data from S&P Global Market Intelligence. Their average annual earnings growth forecast stands at 3% over the next three to five years.

Healthpeak Properties

• Market value: $17.9 billion
• Action: Dividend decrease
• Annual dividend prior to change: $1.48 per share

Healthpeak Properties (PEAK, $33.29), a real estate investment trust (REIT) that invests in life sciences, medical offices and senior housing properties, cut its dividend in February by 19%.

The most recent quarterly dividend of 30 cents per share – down from a previous payout of 37 cents a share – will result in annual dividend savings of about $150 million. At a projected $1.20 a share annually, PEAK's dividend yield comes to 3.6% as of the end of June.

Analysts applaud the REIT's efforts to transform its portfolio by selling its more than $4 billion senior housing portfolio, but note that the asset sales are also a drag on near-term earnings.

Indeed, by one measure, PEAK would appear to have ample resources backing its dividend. After all, the company spent a total of $787.1 million on dividends in 2020 – up from $720.1 million the previous year – and still had $1.6 billion in free cash flow after paying interest on debt.

However, net income in 2020 came to just $413.6 million. When the bottom line has to catch up to the dividend amid a costly repositioning of the business, PEAK's financial prudence is understandable.

Besides, analysts say that reducing exposure to senior housing facilities is a critical strategic move.

"In the wake of the sharp increase in COVID cases in late 2020 into January 2021, we lower our outlook for senior housing given weaker occupancy trends and higher operating expenses," says Mizuho Securities analyst Omotayo Okusanya, who rates PEAL at Neutral (Hold). "Transforming its portfolio to majority life sciences and medical office buildings could result in positive re-rating from the investor community."

Analysts' average recommendation on PEAK comes to Buy. They forecast the company to deliver average annual earnings growth of 3.9% over the next three to five years, according to S&P Global Market Intelligence.

National CineMedia

• Market value: $409.8 million
• Action: Dividend decrease
• Annual dividend prior to change: 24 cents per share

National CineMedia (NCMI, $5.07) isn't a movie chain, but it has been hammered by the pandemic in just the same way. The company displays advertising to movie-goers throughout the U.S., and with cinema attendance only just starting to trickle back after a long pandemic drought, revenue has been hurting.

NCMI reduced its quarterly payout to 5 cents a share from 7 cents a share as part of its fourth-quarter earnings release in early March, but analysts say investors shouldn't be alarmed by the move.

Wedbush's Michael Pachter, who rates NCMI at Neutral, says payout reduction was "out of an abundance of caution," as the company has more than enough cash available for dividends, income tax payments, and other fees.

Furthermore, the analyst is cautiously optimistic about the course of its business as theater chains gradually normalize operations.

"We think NCM will be well-positioned within the ad delivery ecosystem once attendance rebounds, but currently low theatrical attendance severely limits NCM’s ability to sell impressions even as advertisers are ready," writes Pachter in a note to clients. "As theatres reopen and the release slate schedule becomes more clear, we view NCM's position as increasingly positive."

At 5 cents a share per quarter, or 20 cents per share annually, the yield on NCMI's dividend came to 3.9% as of the end of June. Analysts' consensus recommendation stands at Hold, according to S&P Global Market Intelligence.