AT&T Sets its Record Date for the Warner Bros Discovery Stock Dividend

• March 25, AT&T set Tuesday, April 5 as the Record Date for the spin-off to its shareholders of shares in Warner Bros Discovery (WBD)
• This company, in which AT&T shareholders will hold 71%, is the result of a merger between WarnerMedia, owned by AT&T, and Discovery, Inc.
• Every AT&T shareholder as of the ex-date, Monday, April 4, will receive .24 shares in WBD for every 1 T shares they own

On March 25, AT&T (T) announced it will spin-off its 100% ownership of WarnerMedia to shareholders of record on Tuesday, April 5. That means that the ex-date is Monday, April 4. The spin-off will be in the form of a stock dividend to shareholders of AT&T. 

That means that current shareholders of AT&T don't have to do anything to receive this stock dividend. It will simply show up in their brokerage account when the transaction closes. The WarnerMedia spinco shares will be merged with a new company called Warner Bros. Discovery. This will be the result of a merger between Discovery Inc (DISCA, DISCB, DISCK) with the WarnerMedia spinco.

What AT&T Shareholders Will Receive

On the closing date of the transaction, anticipated to be in April, AT&T shareholders will receive, on a tax-free basis, an estimated 0.24 shares of stock in Warner Bros. Discovery, Inc. (WBD) for each share of AT&T common stock. That means that for every 100 shares in AT&T they will receive 24 shares in WBD when the deal closes sometime in April.

The AT&T shareholders will continue to own all the shares they previously held prior to the ex-date, April 4. But if they sell any AT&T shares prior to Monday, April 4, they will receive proportionally fewer shares in WBD.

However, you should expect that as of Monday, April 4, the ex-date, AT&T's stock will fall. Even AT&T indicated that will happen:

“After close, investors should expect that AT&T’s share price will adjust to reflect the transfer of the WarnerMedia business to the newly formed Warner Bros. Discovery entity.”

I've argued before that the shares of AT&T will fall by between $6 and $7 per share. At today's price (March 25) of $23.84, that implies that the new price for AT&T will be $16.84 to $17.84.

The New AT&T Dividend

On March 25, AT&T also announced that it will pay a new, lower quarterly dividend of 27.75 cents per share for Q2. This is for shareholders after the ex-date. It is consistent with the company's new $1.11 per share annual dividend policy, down 46.63% from its previous $2.08 dividend per share.

Therefore, if AT&T falls to say the mid-point of expectations ($17.34), the new dividend yield will be 6.40% going forward. However, AT&T shareholders also will have WBD shares in their accounts. They can do several things with these shares.

It won't be clear where the new price of WBD will trade, or the price of the AT&T stock will trade until all the details of the merger are known.

What AT&T Shareholders Should Do

Theoretically, they can sell the WBD shares (not in time for the first dividend) and then buy more AT&T shares to receive roughly the same dividend as before. But this will mean having to pay a capital gains tax on the WBD shares received, which can be tricky. 

Next, the shareholder will have to decide how to apportion the cost of their investment in AT&T between the T stock they keep and the new WBD shares. AT&T will probably provide some guidance, as many companies do, after the close of the transaction. 

In addition, the shareholder runs the risk that the post-close AT&T stock rises, meaning they will receive fewer shares than they held before.

It will probably be simpler and easier to simply buy more AT&T shares to receive the same dividend amount in dollars as before or to just hold on to both the AT&T and WBD shares. Many investors are likely to be dumping their WBD shares and that could depress the price for the first several months.

It seems that the best option then is to wait, and accumulate new shares in either AT&T or WBD if they significantly fall subsequent to the closing of the merger or even the ex-date on April 4.