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.
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|
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.
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.
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.