Company Description: AT&T Inc. provides telephone and broadband service and holds full ownership of AT&T Mobility (formerly Cingular Wireless). Plans to acquire T Mobile USA were recently scrapped.
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 premium to all four valuations above. Since T's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 36.3% premium to its calculated fair value of $21.61. 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 two Stars in this section for 2.) and 3.) above. 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 28 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 the $1,509. This amount is in excess of the $700 target I look for in a stock that has increased dividends as long as T has. The stock's current yield of 5.84% exceeds the 3.1% estimated 20-year average MMA rate.
Memberships and Peers: T is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: CenturyLink, Inc. (CTL) with a 7.7% yield, Sprint Nextel Corp. (S) with a 0.0% yield and Verizon Communications Inc. (VZ) with a 5.3% yield.
Conclusion: T did not earn any Stars in the Fair Value section, earned two Stars 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 $39.60 before T's NPV MMA Differential decreased to the $700 minimum that I look for in a stock with 28 years of consecutive dividend increases. At that price the stock would yield 4.3%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $700 NPV MMA Differential, the calculated rate is -0.9%. This dividend growth rate is lower than the 2.4% 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.
T is in a strong competitive position. Such a strong competitive position, that it abandoned it bid to purchase T-Mobile due to concerns that regulatory approval would be hard to come by. The gains in consumer wireless and broadband should continue to outpace losses wireline customers. It should generate good operating margins in 2012.
The company has a strong balance sheet and exercises power over many of its suppliers. A concern is its Free Cash Flow payout has crept up to 68%, which is at the higher end of its 10 year range. It is currently trading well above my calculated fair value price of $21.61, so for now I will wait for a more favorable time to add 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 (2.8% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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