Stock Valuation AT&T

The following stock valuation is about AT&T, one of the first stocks in my portfolio and probably a core holding in every dividend growth Portfolio. AT&T has increased its dividend since 32 years and one of its strength is the very high yield compared to other dividend stocks. At the same it always a very high pay out ratio, which does not allow high growth. Recently AT&T is in the news with the Time Warner deal, which would increase the high level of debt further. But let’s have a look if AT&T is currently worth of an investment.

Company Overview

AT&T (T) is a holding company that providers telecommunication services worldwide. The company offers several services including wireless communications, local exchange services and long-distance services. AT&T mainly sells services and physical products. It has increased its dividend since 1985.

Valuation

Currently T is priced  at 40.59 USD per share.

Valuation_AT&T

If I take the weighted average of the 4 ratios according to the 5  year average the price would be at 44.50 USD. That means the current price is 8.8% above its 5 year average. The 5 year high was at 43.47 USD a couple of weeks, so currently the stock just trades 6.6% below its 5-year high. The point that five year average price is above the five year high comes from the high Price/Earning ratio average. The reason for that high average was the year 2015 as it was at 38.2.

The fair market value ratio of the communication sector , according to morningstar is currently at 0.96. If I divide the current price by it I will get a price of 42.28 USD.

Earnings per share growth

In 2011 the EPS were at 0.66 USD and EPS in 2016 were at 2.10USD. This makes it an average growth per year of 26.05%. But again 2011 EPS were not really that good, especially when looking at the pay out ratio which was way above 100%.

Dividend History and Future

T has an impressive dividend history with increasing the dividend for 32 years in a row. In the last 5 years, the average growth per year is 2.21% based on a dividend of 1.73 USD in 2011 and a current full year one of 1.93 USD. The payout ratio with 91.9% is currently on a high level but based on the EPS expectation for 2017 and 2018 and a lower dividend growth I think the payout ratio will go back to a more reasonable level.

An important point for my buying decision is as well the dividend yield on cost, which is currently at 4.8% based on the new yearly dividend of 1.96 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming now a dividend growth rate of 2% per year the dividend in 2020 will be at 2.08 USD, which means a yield on costs of 5.12% before tax.

Conclusion

Even though it looks like that AT&T is currently undervalued I am a little cautious about that stock. The reasons are the high debt level and the high pay out ratio. I am also a little critical about the Time Warner deal as it will increase the debt level even further. Nevertheless I am having it on my watch list as I think it is a very stable stock and its revenue growth in the last years was really very good. For me a good entry point would be around 36.00 USD. That means I am hoping for a further decline of 11%.

What do you think about T? Do you already have it in your portfolio or would you buy it at its current price?

Disclosure: Long T

I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.

6 Comments

  1. Big fan of T. Major player in the communications industry. Slow and steady dividend increases. You know what you are getting with this stock. I do like their recent acquisition and it should continue to unlock/increase the future cash flows. Thanks for the analysis!

    Bert

    • Hi Bert,
      thanks for the comment. You are right AT&T should be one of the core holdings in each dividend portfolio and I am most probably buy more but just not at the current price.

  2. Agreed with dividend diplomats,
    This is a very stable company and I’m not seeing a decline to 36$ a share unless the time Warner deal gets declined. Anything south of $40 is a good entry point personally. The whole telecommunications market is shifting currently so we will have to see if they can keep up. As long as they keep increasing payouts I’ll stick around.

    • Hi,

      thanks for the comment. Let’s see if there will be decline to 36 USD. For me it is currently just too expensive. But I am really hoping for some discounts :)…

    • Hi Troy,
      you are right impressive dividend history and a very good yield. What do you want more as a dividend investor :)…

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