What happened

Shares of AT&T (NYSE:T) fell 5.8% on Tuesday as shareholders reacted to the likelihood of substantially reduced cash payouts from the media titan following the pending spinoff of its WarnerMedia business.

So what 

AT&T announced on Monday that it intends to merge its WarnerMedia assets with Discovery to create a new streaming-focused company. In return, AT&T stands to receive $43 billion, which it will use to reduce its sizable debt load. 

Analysts and investors applauded that part of the plan. What they didn't like, however, was the prospect of AT&T cutting its dividend nearly in half following the spinoff. 

A downwardly sloping stock chart.

AT&T's stock price sank on Tuesday. Image source: Getty Images.

AT&T said it would "resize" its dividend to account for the distribution of WarnerMedia to shareholders. Management anticipates that the company will pay out between 40% and 43% of its forecast annual free cash flow of $20 billion. That would place its post-spinoff dividend at roughly $8 billion per year, compared to the $15 billion it distributed in 2020. 

Now what

Skeptics have long questioned whether AT&T could continue to support such a high dividend, particularly after its debt load exploded to more than $180 billion following its acquisition of Time Warner in 2018. These concerns were reflected in AT&T's dividend yield of over 7%, which is well above rival telecom titan Verizon's 4.4% yield. When a company sports a significantly higher dividend yield than its industry peers, that can indicate that investors are worried that it may eventually need to cut its payout, and pricing the stock accordingly. In this case, it appears the skeptics were correct.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.