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Stock Analysis: AT&T Inc. (T)

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). AT&T Corp. was acquired in late 2005 and BellSouth in late 2006.

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 6.9% discount to its calculated fair value of $26.52. 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 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 27 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 $1,737. This amount is in excess of the $800 target I look for in a stock that has increased dividends as long as T has. The stock's current yield of 6.8% exceeds the 4.02% 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 earned one Star 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 five Stars. This quantitatively ranks T as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $32.25 before T's NPV MMA Differential decreased to the $800 minimum that I look for in a stock with 27 years of consecutive dividend increases. At that price the stock would yield 5.21%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $800 NPV MMA Differential, the calculated rate is -0.4%. This negative dividend growth rate is less than the 2.4% used in this analysis, thus providing a margin of safety. T has a risk rating of 1.25 which classifies it as a low risk stock.

In spite of a poor economy, T has performed well over the past year. The iPhone has provided gains in consumer wireless and should continue to do so near-term. Declines in landlines will continue to pressure T, but gains in consumer wireless and broadband should help to offset these. The company has a strong balance sheet and generates good free cash flow. I will continue to strategically increase my position in T when it is trading below my buy price of $26.52 and as my allocation allows. 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 was long in T (2.6% of my Income Portfolio). See a list of all my income holdings here.


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