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.