Top
Of The News: AT&T Slashes And Burns
Welcome
to the new economy, AT&T.
The
massive phone company, fresh off its breakup into four companies, slashed its
quarterly dividend--for the first time in its 113-year history--by 83%, and
warned fourth-quarter revenue and earnings will fall short of Wall Street's
estimates.
The
dividend cut is in part to pay down debt, but it also seems partly due to
AT&T's (nyse: T) new self-image as a fast-moving Internet and wireless player. It
has arrived at the new economy party. Unfortunately, it is showing up just when
the janitors are mopping up and the drunks are being hauled off to prison.
AT&T
said it expects earnings to be 26 cents to 28 cents per share. Wall Street
expected 31 cents.
The
dividend will be 3.75 cents per share each quarter, compared to 22 cents
previously. The company said last month that it might cut its dividend as part
of its reorganization. The company waited, though, until its monthly board
meeting yesterday to make a formal announcement.
While
it may not have been a surprise, the dividend cut is still historic. "This
is dramatic. This is like Ivory soap sinking," says Samuel Hayes, a
professor at Harvard Business School.
Hayes
points out that even during the Great Depression, AT&T kept its dividend
constant, even as other industrial giants cut theirs. It was the classic widow
and orphan stock.
No
longer. AT&T shares traded at $16.62 this morning, its lowest point in more
than a decade. Since the beginning of the year, the stock is off 65%. That
would be one thing for some Internet startup. But this is AT&T! It is the
nation's eighth-largest company with revenue of $62 billion--three times that
of Microsoft (nasdaq: MSFT).
"While
we did not make this decision lightly, we believe it is necessary and in the
best long-term interests of our shareowners to adopt a dividend policy
comparable to the policies of our competitors," says AT&T Chairman C.
Michael Armstrong.
The
cut will save the phone giant about $2.74 billion a year. It needs the cash to
pay down $62 billion in debt and to invest in growth businesses such as
wireless and cable. Exactly how much of the dividend will be allocated to each
of the four AT&T companies is still to be determined, the company said.
The
announcement didn't cause yesterday's stock market meltdown, but it didn't
help. The company blamed the earnings shortfall on the continued erosion of its
long-distance telephone business, still the nation's largest.
In
the last month, the company has announced it will sell as much as $25 billion
in nonstrategic assets in order to pay down its debt. This debt was generated
by Armstrong's merger binge in which he bought more than $100 billion in cable
and wireless companies for cash and stock. The bill was considerably more than
the company's market capitalization, which is now less than $70 billion.
The
various restructurings, the company says, are designed so AT&T can get in
gear with its telecom competitors. But with selloffs and spinoffs following its
cable and wireless shopping spree, AT&T's transmission looks shot.