AT&T- Stock Analysis

external-content.duckduckgo.comAT&T, a dividend aristocrat, now a global behemoth, nominally started when the words “Mr. Watson, come here, I want to see you” were spoken over a telephone March 10, 1876 by Alexander Graham Bell to his assistant Thomas Watson. A phone call, placed to a location 8 miles away over telegraph lines, occurred only a few months later demonstrating the effectiveness of this new invention. The Bell Telephone Company was created in 1877 and the widespread purchase of the telephone was underway across America. Eventually, the American Telephone and Telegraph Company acquired the Bell Company and established a monopoly lasting almost 100 years. The company, nicknamed Ma Bell, was broken up into smaller pieces in 1982 by U.S. regulators. SBC Communications, purchased its former parent company in 2005 and renamed itself AT&T.

AT&T is headquartered in Dallas, Texas and is listed on the New York Stock Exchange under the symbol T. The company is a holding corporation participating in the telecommunications, media, and technology industries. AT&T is divided into four separate reporting segments: Communications, WarnerMedia, Latin America, and Xandr. The Communications segment is the largest of the four divisions accounting for over 75% of the top line revenue in 2019. AT&T purchased WarnerMedia in 2016 for a cost of $48.5 billion to offset slowing growth in its wireless business.

Consumers have the ability to utilize AT&T as their wireless provider for a mobile phone or home internet. The AT&T website lists the Apple iPhone and Samsung Galaxy for purchase, along with multiple accessories to customize your phone. A shopper trying to find television service for their residence can bundle television and internet together with a few clicks of a button. Recently, AT&T launched HBOMax to compete with other streaming services such as the one offered by Disney. AT&T is mentioned by many, including the Dividend Diplomats, as a core dividend paying company. However, we need to put AT&T through my stock screener to judge if the company is a good investment in June, 2020.

Earnings/Revenue

AT&T is an enormous company with a $237B market cap. The sales revenue over the past epsdecade is up nearly 50%, but much of the growth occurred between 2014-2016. The purchase of WarnerMedia has not spurred the top line revenue to soaring new heights since its acquisition. Earnings per share are choppy at best showing a decline in annual growth rate (cagr) over the past 5 years. The chart shows a steep decline in diluted eps from 2017 to 2019.

revenueThe 2019 annual report predicted revenue growth of 1-2% over the next 3 years, but this was a pre-pandemic statement. The declines in the Communications segment and weakness in the Latin America business offset gains in the WarnerMedia portion. The recent launch of HBOMax is only a few weeks old but was left off Amazon and Roku’s streaming platforms. AT&T needs its premium streaming offering to penetrate into the competitive world of Netflix, Hulu, Disney, and Amazon to boost revenue this year.

Dividend/Yield

AT&T’s place on the list of dividend aristocrats is secure in 2020. Outgoing CEO, Randall dividendStephenson noted in his letter to shareholders, “We’ll continue to grow our quarterly dividend, as we’ve done for 36 straight years.” The 5-year cagr of the dividend is 2.1% and the 10-year rate is 2.2%. The dividend growth of this mature company is not dramatic but has been steady for the past decade.

Currently, AT&T is yielding 6.26%, above my requirement of 2.5% for possible yieldinvestments. The yield looks high, but AT&T shows a pattern of being a stock yielding over 4.0% the past decade. The current yield fits nicely between the 10-year high and low making a purchase more appealing. Yield is calculated by dividing the divided by the stock price- in this case, the stock may be selling at a discounted level.

Price/Earnings Ratio

The Price to Earnings Ratio is found by dividing the stock price by the last 12 months of earnings per share. A high PE means the stock price is high compared to earnings, with a low PE showing more value. I look for two aspects of the PE ratio while screening out pestocks prior to making a purchase. Is the current PE under 20 and where is it compared to the last decade? AT&T has been trading inside very tight bands over the past decade. There is very little separation between the high/low PE’s displayed on the chart. The current PE of 16.88 is slightly below the average price to earnings ratio since 2010.

Payout Ratios

Dividend growth is important when picking the correct stock for purchase. Investors arepayout able to judge future dividend growth by analyzing the earnings per share and free cash flow payout ratios. A company without enough earnings to support their dividend may slash the payout. The current dividend is over 100% of AT&T’s earnings the last 12 months. Surprisingly, this is not the highest earnings to dividend payout ratio over the past decade. The dividend to free cash flow payout ratio is more respectable at 51.6%. AT&T remains committed to their dividend and the free cash flow ratio indicates they can sustain the trend of 2% raises seen over the past 10 years.

Future Estimates

AT&T is a proven company with a flawless record concerning dividend payments. The Argus analyst report predicts a small dividend increase from $2.08 this year to $2.12 in 2021, in line with consistent $.04 raises over the past few years. AT&T earnings estimates are anticipated to be $3.20 this year with limited growth in 2021. AT&T can grow earnings with further implementation of WarnerMedia and release of 5G handsets from Apple and Samsung in the back half of 2020. Based on these approximations- the dividends to earnings per share payout would decline to 64% in 2021.

Fair Value

Calculating fair value has many different methods- and I combine two analyst reports, 5-year high yield, dividend discount model and 5-year average low P/E ratio as a guide to pricing a stock. The combination of these show a fair value price of $37.00 for AT&T.

Final Thoughts

AT&T is no longer the most powerful company in communications with heated competition from major rivals in Verizon or Sprint. Morningstar bestowed a narrow moat to AT&T due to intense rivalries in the communications sector. The company’s attempt to penetrate the crowded streaming market with HBOMax is going to be tough. People are still married to their cell phones and the 5G upgrade may provide a bump for AT&T. AT&T is committed to their dividend and raised it for over 3 decades. The P/E ratio and yield make a strong case to purchase AT&T, and my fair value shows a discount in the stock price over 10%. The prospects for dynamic stock price increases may not be there for AT&T in the short term. The stock may be attractive to a long-term investor focused on securing a consistent dividend, but before opening a brand-new position, it may pay to look elsewhere. If you are looking to add to a current position, this may be a solid buying opportunity- but do your homework before any purchase.

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