On Friday, AT&T (T) announced plans to seek government approval for a transaction worth roughly $9.5 billion aimed at reducing the existing deficit within the company's retirement trust. The funds, which are expected to be created by transferring roughly $9.5 billion in equity from its wireless operations, would be placed in a trust that was previously established and subsequently designated for its 360,000 retirees. As of 2011, the retirement trust was underfunded by $10.2 billion and if approved, this transaction would make up for roughly 93% of that deficit. As an AT&T shareholder who happens to be income-driven I have a major problem this and here' why.
The dividend darling of the Dow 30 that we all know and love may possess a very dark secret if this transaction is actually approved. Why? The company intends on transferring approximately $9.5 billion is company stock to the retirees trust and as a result a total of $560 million a year would be paid out in dividends that would eventually reach the pockets of the above mentioned 360,000 retirees. Here's the kicker, if the company can't for whatever reason meet the expectations of the retirees trust, "it promises that if it can't come up with the cash, it will suspend its dividend to regular shareholders and stop share buybacks." As an income-driven investor I understand the concerns current shareholders will have surrounding the possibility of AT&T suspending its dividend since it would substantially change the strategy by which individuals acquire shares.
From an income-based investors perspective (like myself) this is a potentially negative catalyst. From a long-term growth perspective this may not be such a bad thing, especially for the buy-and-hold investors (specifically those buy-and-hold investors who are not primary concerned with the company's dividend payouts). Why? According to StreetInsider.com, "As reported in the AT&T Annual Report on Form 10-K for the year ended December 31, 2011, the present value of AT&T's pension liabilities exceeded the fair value of trust assets by approximately $10.2 billion at December 31, 2011. This contribution will significantly improve the funded status of the Plan, enhancing the strength of the trust for AT&T's employees and retirees. After a period of five years from the contribution or if earlier, the date upon which the Trust is fully funded as calculated under U.S. generally accepted accounting principles, AT&T has the right to purchase the Preferred Interest. In addition, AT&T will have the right to purchase the Preferred Interest in the event AT&T's ownership of Mobility is less than fifty percent (50%) or there is a transaction that results in a spin-off of more than fifty percent (50%) of the Trust's assets (collectively, a change of control)."
The reason why the growth-driven investor benefits is because the company has the ability to repurchase the Preferred Interest after a period of five (5) years and ultimately reinstate the equity back to the company's mobility-based operations. The reason why the income-driven investor suffers is because of the possibility of the suspension of the company's dividend. The end result isn't to avoid an investment in AT&T at this point, but to essentially change the strategy by which one chooses to invest.
Disclosure: I am long T.