How to interpret Warren Buffett’s new AT&T

If there is one investor who is the best known of the past few decades, it would have to be Warren Buffett. This is why his Berkshire Hathaway Inc. (NYSE: BRK-A) is so closely watched when it comes to portfolio changes, investments and acquisitions. 24/7 Wall St. tracks the so-called Buffett holdings each quarter and as new changes are learned. It turns out that the most recent Berkshire Hathaway holdings contained more changes than have been seen in some time.

What stood out to some investors in the holdings as of September 30, was a new stake listed in AT&T Inc. (NYSE: T) and a massively larger stake in Kraft Heinz Co. (NASDAQ: KHC). That new Kraft Heinz stake was not grouped entirely in the equities amount previously of $106.1 bln from June 30 — and the total equity holdings for September 30 was listed as a record of $127.4 bln.

The first thing that investors need to consider about the new AT&T stake is that it should not really be considered all that new. Berkshire’s holding of AT&T is actually tied to AT&T’s acquisition of DirecTV that was completed this summer.

It was more or less an unknown how the conglomerate’s portfolio managers would actually treat AT&T’s shares on a post-merger basis. Now the reality appears to be that the DirecTV stake was at first a play on media and monthly subscription services, which then may have ultimately become a cheaper way of owning AT&T rather than just buying AT&T shares outright. That would then come with yet more subscriber revenue exposure ahead and the most impressive dividend of the largest companies in America. Had this not been the case, then logic would dictate that those AT&T shares would have been sold off in the open market over the course of the quarter.

The AT&T stake was listed as 59.32 mln shares as of September 30. Berkshire Hathaway’s stake in DirecTV in June was listed as the same stake of 31.35 mln shares, but this was after the stake had been previously raised in prior periods. The formal merger terms were in cash and stock, as follows: “As a DIRECTV shareholder, you are entitled to receive for each share of DIRECTV common stock an amount equal to $28.50 in cash, and 1.892 shares of AT&T common stock, which represents the exchange ratio determined per the terms of the transaction. You may also receive cash in lieu of a fractional share of stock based on a per share price of $35.14.”

When you multiply the 31.35 mln DirecTV shares by the 1.982 exchange ratio, without considering the cash portion of the deal, you get just over 59.3 mln shares of the surviving company — and that matches the 59.32 mln shares. In short, Buffett took the cash but kept the surviving shares in AT&T.

If you just looked at Monday’s headlines around AT&T, you would have thought that Buffett and his newer portfolio managers just acquired AT&T shares in the open market. That is not the case at all. Here are the main headlines seen elsewhere on Monday morning:

- AT&T (T) Stock Up as Warren Buffet Adds to Portfolio (TheStreet);

- Warren Buffett adds AT&T to portfolio, cuts stakes in Goldman, Wal-Mart (MarketWatch);

- Warren Buffett Cuts Stake in Goldman, Wal-Mart, Adds AT&T to Portfolio, 13-F Says (Barron’s); - AT&T and GM among Buffett’s Q3 adds (Seeking Alpha); - Buffett’s Berkshire Hathaway Shows New Stake in AT&T (T), Pares Wal-mart (WMT), Goldman (GS) Positions — 13F (Street Insider);

- Berkshire Hathaway Takes New Stake in AT&T, With 59,320,756 Shares — 13F Filing (Dow Jones).

Another consideration here is that Verizon Communications Inc. (NYSE: VZ) is also a current Buffett stock holding. Verizon was the same stake at 15 mln shares, but that had been raised two quarters ago.

The new total Berkshire Hathaway holdings, based on September 30 share prices, would value the new AT&T stake at roughly $1.9 bln and would value the Verizon stake at $645 mln or so.

It is no secret that Buffett loves dividends. It is also now