AT&T (T) is one of the two dominant U.S. wireless carriers, competing with the other telecom giant Verizon (VZ). Together these two companies service 60% of wireless customers. AT&T is also the main local phone company in many states, with 40 million phone lines, 16 million internet users, and 4 million television customers.

AT&T stock currently trades at $30.94, with a 52-week range of $27.29-$31.97. The current dividend yield is 5.69%, which is exceptionally high. Here is the dividend history for the last 10 years.

Year |
Dividend |
Growth |
---|---|---|

2002 | $1.066 | 4.02% |

2003 | $1.368 | 28.25% |

2004 | $1.25 | -8.59% |

2005 | $1.29 | 3.20% |

2006 | $1.29 | 0% |

2007 | $1.42 | 10.08% |

2008 | $1.60 | 12.68% |

2009 | $1.64 | 2.50% |

2010 | $1.68 | 2.44% |

2011 | $1.72 | 2.38% |

The growth rate of dividends has been a bit erratic, but the last three years has seen more predictable growth. Let's look at the payout ratios. I will use percentage of the free cash flow instead of earnings to determine the payout ratio.

Year |
Free Cash Flow (Mil $) |
Float (Mil Shares) |
Payout Ratio |
---|---|---|---|

2002 | $8,402 | 3,345 | 42.45% |

2003 | $8,298 | 3,322 | 54.75% |

2004 | $6,997 | 3,326 | 59.2% |

2005 | $7,088 | 3,370 | 61.33% |

2006 | $7,295 | 3,892 | 68.82% |

2007 | $16,355 | 6,170 | 53.57% |

2008 | $13,321 | 5,958 | 71.56% |

2009 | $17,110 | 5,924 | 56.78% |

2010 | $14,691 | 5,938 | 67.90% |

2011 | $14,538 | 5,950 | 70.39% |

The payout ratio has been high for the last two years, around 70%. The average analyst estimate for earnings growth for the next 5 years is 7.78%, and I would expect this ratio to decrease as earnings increase faster than dividends.

**Valuation**

I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 2% annually in perpetuity, which is close to the dividend growth rate over the last few years. Using these parameters I arrive at an estimated fair value of $29.24 for a share of AT&T.

**Conclusion**

AT&T looks to be fairly valued from a dividend point of view, trading very close to my estimated fair value. AT&T has an exceptionally high yield, and even with fairly slow future dividend growth it looks like AT&T is trading at a fair price compared to the value of those future dividends. It would be a good addition to a dividend focused portfolio.

**Disclosure: **I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.