AT&T Dividend Stock Analysis
A fat AT&T dividend has attracted many investors to this stock. And it is a popular pick by dividend stock bloggers.
Therefore, I thought it time to take a fresh look at this well-known company. Most noteworthy, AT&T stock is one of my larger holdings.
So please join me for a dividend deep dive of this huge telecommunications firm.
AT&T is a world leader in communications, media, entertainment, and technology.
The company consists of four business units:
AT&T Communications provides mobile, broadband, video and other communications services to U.S. based consumers and nearly 3 million companies globally.
WarnerMedia consists of WarnerMedia Entertainment, WarnerMedia News & Sports, and Warner Bros.
AT&T Latin America provides mobile services in Mexico to consumers and businesses plus Vrio’s pay-TV services across South America and the Caribbean.
Xandr provides marketers with advanced advertising solutions using insights from AT&T’s TV, mobile, and broadband services combined with the extensive ad inventory of WarnerMedia’s cable networks and AT&T’s pay-TV services.
Revenue Share By Business Unit
The chart below shows each business unit’s share of 2018 revenues. Clearly, the communications business unit is the dominant player representing 75% of total revenues.
Through these businesses, AT&T brings together the following key elements in media and entertainment:
- Premium video content
- A large base of direct to consumer relationships
- An advertising market place through Xandr
- High-speed networks optimized for video and advertising technology
The company aims to lead the next revolution in technology, media, and telecommunications.
Finally, AT&T is a Fortune 10 company. And AT&T stock trades on the New York Stock Exchange under the ticker symbol T (NYSE: T).
Source: AT&T Company Profile
AT&T Dividend Yield
AT&T is paying an annual forward dividend of $2.04 per share. This is a 6.2% dividend yield at the recent AT&T stock price.
AT&T Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
If you believe in the old saying that “slow and steady wins the race”, then AT&T dividend growth is for you. The company’s dividend has grown slowly but consistently as shown in the chart above.
With this type of consistency, it’s not hard to formulate a forecast for future dividend growth. For my planning purposes, I’m going to go out on a limb and use 2%.
Finally, AT&T has an impressive annual dividend increase streak. The company has increased its dividend on an annual basis in each of the past 35 years.
AT&T Revenue Trend
AT&T’s wireless and wired communications businesses are the largest share of the company’s revenue at $144 billion in 2018. As you might expect, the wired business has been in decline for years.
In addition, wireless has become a more price-sensitive commodity service. These trends in the communications business have put downward pressure on revenues.
And, have led the company to seek acquisitions to grow. First, the acquisition of DIRECTTV in 2015. Then, Time Warner in 2018.
AT&T Dividend, Earnings & Payout Ratio
I find AT&T’s accounting earnings hard to interpret. They are full of non-cash costs for depreciation from the company’s large and necessary capital investments. In addition, they include amortization costs and one time charges associated with their acquisitions.
And for 2017, the company also took a large one-time non-cash expense to account for the impact of the new tax law. For comparison purposes, I have adjusted 2017 earnings in this article to eliminate the 2017 tax charge.
Over the long term, AT&T’s accounting earnings exceed the dividend payout. However, it has certainly not been a smooth ride.
So for capital intensive businesses like AT&T, I especially like to look at free cash flow to assess dividend safety. Let’s take a look at that right now.
Free Cash Flow
Free cash flow is the cash-based profits from the business less cash spent on capital investments.
And AT&T must make large capital investments each year. Those cash outlays are especially critical to maintain, upgrade and expand their telecommunication networks.
The chart below presents the recent annual cash dividends paid in relation to AT&T’s free cash flow on an annual basis.
Based on free cash flow, the dividend appears to be well covered. In fact, 2018 dividends paid consumed less than 60% of free cash flow. This is pretty solid dividend coverage in my opinion.
And in 2018, AT&T was able to use excess cash flow to pay down debt. This was good to see, as the company took on large amounts of debt in recent years.
AT&T Credit Ratings & Balance Sheet
Let’s now check what AT&T’s financial leverage and credit rating look like.
AT&T has a Baa2 and BBB credit rating from Moody’s and S&P, respectively. These ratings represent “investment grade – moderate credit risk”.
Most solid dividend paying companies hold investment-grade credit ratings. And, AT&T is no different. However, AT&T’s credit ratings are at the very low end of the investment-grade range.
Lower ratings are likely a result of AT&T taking on large amounts of debt financing in recent years. This was primarily due to the costs to acquire DIRECTTV and Time Warner.
Finally, AT&T’s debt to equity ratio checks in at .95 to one.
This looks reasonable in comparison to S&P 500 companies that overall carried a .86 to 1 debt to equity ratio last year.
Source: Yardeni Research
AT&T Stock Valuation
Let’s judge value in several ways:
- Dividend Discount Model
- Morningstar fair value estimate
- Personal Finance investment newsletter buy target
- Utility Forecaster investment newsletter buy target
- Price to earnings ratio
Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far.
- Current annual dividend payment – $2.04 per share
- Projected dividend growth – 2%
- My desired annual return on investment – 9%
Using these assumptions, the dividend discount model calculates the fair value of AT&T stock at $30 share.
Morningstar Fair Value
The investment analysis firm Morningstar believes AT&T stock is fairly valued at $37 per share.
Personal Finance Investment Newsletter
The longtime investment newsletter Personal Finance places a buy target on AT&T stock at $34 per share.
Source: Personal Finance
Utility Forecaster Investment Newsletter
Utility Forecaster, another of my favorite investment newsletters, has a buy target on AT&T stock of $40 per share.
Source: Utility Forecaster
AT&T Stock Price to Earnings Ratio
The AT&T stock price to projected 2019 earnings sits at about 11 times. To compare, the S&P 500 forward price to earnings ratio is approaching 18 times.
Based on this measure, AT&T stock is trading at a 39% discount to the market as a whole.
AT&T Stock Valuation Summary
We have looked at a number of valuation methods that suggest a range of values for AT&T stock.
Here is a summary:
- Dividend Discount Model – $30 per share
- Morningstar Fair Value – $37 per share
- Personal Finance Newsletter buy target – $34 per share
- Utility Forecaster Newsletter buy target – $40 per share
- Price to Earnings Ratio – 39% discount to S&P 500
With the exception of the dividend discount model, AT&T stock appears to be reasonably valued at recent prices.
As I assess this range, I’m going to set a personal buy target of $34 per share or less. This price sits in the middle of the valuation range and equates to a very healthy 6% AT&T dividend yield
AT&T Dividend Stock Analysis Summary
Attractive dividend yield at 6.2%
Modest but consistent dividend growth at 2% annually.
Safe dividend consuming less than 60% of free cash flow
Investment-grade credit ratings and a reasonable debt to equity ratio
A fairly valued stock price at recent levels.
AT&T’s high dividend yield is a temptation for me. But with AT&T stock holding an already large position in my investment portfolio, I do not intend to add to my position at this time.
I hope you found this analysis of AT&T and the AT&T dividend useful. If so, here are a couple of other articles and resources that you may find interesting:
My model dividend stock portfolio – The Dividends Deluxe
Another dividend deep dive in the technology sector – Apple
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