Company Description: AT&T Inc. (formerly SBC Communications) provides telephone and broadband service and holds full ownership of AT&T Mobility.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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 only 3.) above. Since T's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 24.4% discount to its calculated fair value of $48.07. T earned a Star in this section since it is trading at a fair value.
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 one Star in this section for 3.) above. 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 35 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) or Treasury bond? 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 $1,393. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as T has. The stock's current yield of 5.5% exceeds the 2.64% estimated 20-year average MMA rate.
Peers: The company's peer group includes: CenturyLink, Inc. (CTL) with a 12.2% yield, Sprint Nextel Corp. (S) with a 0.0% yield and Verizon Communications Inc. (VZ) with a 4.8% yield.
Conclusion: T earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks T as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $54.70 before T's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 35 years of consecutive dividend increases. At that price the stock would yield 3.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is -2.6%. This dividend growth rate is lower than the 2.0% used in this analysis, thus providing a margin of safety. T has a risk rating of 2.00 which classifies it as a Medium risk stock.
The company is well-positioned with its products and superior network. In addition, its acquisition of DirectTV will provide a steady revenue stream. T has struggled against stiff competition from T-Mobile and Sprint, but it still enjoys a scale advantages versus them.
The stock is currently trading below my calculated fair value price of $48.07. At 70% (down from 72%), its Free Cash Flow payout is above my 60% desired maximum, and its Debt to Total Capital of 54% (up from 52%) is also above my desired maximum. For now, I will wait for a more opportune time before adding to my position.
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 was long in T (2.9% of my Dividend Growth Portfolio) and long VZ in my High-Yield portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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Tags: T, VZ, S, CTL,
