Income-oriented investors in
face a choice when they receive shares of the new Warner Bros. Discovery in a spinoff planned for the second quarter.
They can hold onto the Warner Bros. Discovery stock, which is likely to pay no dividend. Or they can sell the shares and reinvest the proceeds back into AT&T (ticker: T).
Barron’s spoke to New York tax expert Robert Willens on the implications of selling the Warner Bros. Discovery stock. The good news is that selling should be favorable for most holders in tax terms given the poor performance in AT&T stock over the past decade.
AT&T said Tuesday that it plans to spin off its $48 billion stake in WarnerMedia to holders when it merges the business with Discovery (DISCA) to form Warner Bros. Discovery. AT&T will get 71% of the combined company. Discovery now pays no dividend and isn’t expected to initiate one following the deal. The merged company will focus instead on paying down heavy debt.
AT&T holders are due to receive about 0.24 share of Warner Bros. Discovery for each AT&T share. AT&T shares were trading late Friday at $24.20, down 37 cents and Discovery stock was at $28.71, off 22 cents.
The current value of Discovery stock is nearly $7 per AT&T share. The new AT&T annual dividend of $1.11 a share, down from the current $2.08 a share, works out to a yield of about 6.4% based on the adjusted AT&T stock price of $17.30 ($24.20 less $6.90).
Many AT&T holders may be tempted to sell their Warner Bros. Discovery stock and buy more AT&T to maintain a 6% yield on the entire investment.
AT&T opted for a spinoff rather than a split-off, or exchange offer, in which AT&T holders could have opted to swap all or part of their shares for Warner Bros. Discovery stock. A split-off would have allowed AT&T investors to retain 100% of their investment in AT&T.
The spinoff of the Warner Bros. Discovery stock isn’t a taxable event, meaning AT&T holders who do nothing should owe no taxes. But the sale of Warner Bros. Discovery stock is a taxable event. Here’s how it would work. Holders would need to allocate part of their cost basis to AT&T and the rest to Warner Bros. Discovery based on stock prices at the time of the spinoff.
Based on current prices, holders probably would allocate about 28% to Warner Bros. Discovery ($6.90 divided by $24.20) and the rest to AT&T.
Willens says while a holder may own Warner Bros. Discovery for just a short period of time before selling, the holding period for tax purposes would be the period of ownership of AT&T, thus qualifying many investors for long-term capital gains treatment subject to a current top rate of 23.8%.
In an email, Willens told Barron’s: “Each shareholder will have a different basis in the DISCA stock depending on his or her basis in the T stock, a portion of which gets allocated to the DISCA stock. In addition, each shareholder’s holding period in the T stock “tacks on” to the DISCA stock. Thus, even though the DISCA stock might be sold shortly after its receipt, it would be considered to have been held for the period during which the shareholder had held his or her T stock.”
“The tax that would be owed on the sale of DISCA shares would depend on the basis of those shares relative to the sale proceeds; the excess of the latter over the former would be the capital gain derived from the sale and that gain, if it were a long-term capital gain, would be taxed at a 23.8 percent rate.”
Since AT&T shares are near a 10-year low, many holders paid more than current stock price and thus their cost basis for both AT&T and the new Warner Brothers Discovery would be above the prices at the time of the spinoff. This means a sale of Warner Brothers Discovery would result in a taxable loss.
“That loss would be a capital loss that you could use to shelter your other capital gains from taxation” Willens told Barron’s.
Write to Andrew Bary at [email protected]