Dividends4Life: Stock Analysis: AT&T Inc. (T)

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Stock Analysis: AT&T Inc. (T)

Posted by D4L | Thursday, January 21, 2010 | | 4 comments »

This article originally appeared on The DIV-Net January 11, 2010.

Linked here is a detailed quantitative analysis of AT&T Inc. (T). Below are some highlights from the above linked analysis:

Company Description: AT&T Inc. (formerly SBC Communications) provides telephone and broadband service, and the company holds full ownership of AT&T Mobility (formerly Cingular Wireless).

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
T is trading at a discount to 1.) and 3.) above. Since T's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 28.1% premium to its calculated fair value of $21.16. T did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
  1. Free Cash Flow Payout
  2. Debt To Total Capital
  3. Key Metrics
  4. Dividend Growth Rate
  5. Years of Div. Growth
  6. Rolling 4-yr Div. > 15%
T earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. T earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 26 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to > MMA
T earned a Star in this section for its NPV MMA Diff. of the $1,408. This amount is in excess of the $900 target I look for in a stock that has increased dividends as long as T has. The stock's current yield of 6.05% exceeds the 3.72% estimated 20-year average MMA rate.

Other: T is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index.

Conclusion: T did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks T as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $31.80 before T's NPV MMA Differential decreased to the $900 minimum that I look for in a stock with 26 years of consecutive dividend increases. At that price the stock would yield 5.16%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $900 NPV MMA Differential, the calculated rate is 0.8%. This dividend growth rate is less than the 2.5% used in this analysis, thus providing a margin of safety. T has a risk rating of 1.75 which classifies it as a medium risk stock.

The weak economy will have a minimal impact on T, but it will see revenue pressure as customers cut back spending, especially on older, highly profitable services, like long-distance voice. Customer migration to wireless is likely to occur faster than expected, thus, near-term margins will likely contract. Long-term, T's scale, customer relationships, and network reach give it an advantage over most of its rivals. Its strong balance sheet and its power over suppliers should help the company generate cash and maintain its dividend. Though T is trading above my buy price of $21.16, it is one I will give strong consideration to initiate a position in in the coming weeks, based on its quality as my allocation and its dividend fundamentals allow. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in T (0.0% of my Income Portfolio). See a list of all my income holdings here.

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  1. Anonymous // January 27, 2010 at 5:35 PM

    Not sure I understand why T receives a star for FCF payout when the detailed information shows a 86% average payout ratio.

  2. Dividends4Life // January 28, 2010 at 6:53 AM

    Anon: The linked PDF showes T's Free Cash Flow Payout at 50%.

    Best Wishes,

  3. Anonymous // January 28, 2010 at 1:09 PM

    I see the 50% FCF payout on PDF...but I do not understand how 50% was determined. When I look at T, it looks like their payout is much higher (around 80%)...How is the 50% determined?

  4. Dividends4Life // January 29, 2010 at 12:15 PM

    Anon: I use a Free Cash Flow payout. I suspect you are looking at a GAAP earnings payout. FCF payout is calculated as " annual dividend per share / ((operating cash flow - capital expenditures) / shares outstanding)

    See (http://dividendsvalue.com/4679/dividend-payout-vs-free-cash-flow-payout/) for more info.

    Best Wishes,

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