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AT&T Inc: An Old Dog Learning New Tricks

May 01, 2012 | About:
AT&T (T) is the largest communications holding company in the world. The company has been restructuring its business for growth which has thus far been a drag on earnings growth. However, AT&T appears poised to reap the rewards of its labors in the future. The company offers a strong dividend yield that should attract a conservative investor looking for maximum income. All in all, we believe this is a conservative high-quality offering for the conservative dividend investor.

Dividend Champion: AT&T Inc

This article looks at AT&T Inc., a Dividend Champion, through the lens of the F.A.S.T. Graphs™ Fundamentals Analyzer Software Tool. Since a picture is worth a thousand words, the reader will be provided the “essential fundamentals at a glance” expressed vividly in pictures. In order to provide you the opportunity to research this company deeper and faster we are providing a link to a live, fully functioning earnings and price correlated set of graphs Found Here. (Tip: Run your mouse over the various lines and watch the graphs come to life.)

A Dividend Champion is defined as a company that has increased its dividend every year for 25 or more straight years. AT&T Inc is a dividend champion that has raised its dividend every year for 28 consecutive years. The complete Dividend Champions list is compiled courtesy of David Fish. (Open as an excel spreadsheet and look at the tabs on the bottom to find the Dividend Champions list).

About AT&T Inc: from their website:

“AT&T Inc. (NYSE:T) is a premier communications holding company and one of the most honored companies in the world. Its subsidiaries and affiliates – AT&T operating companies – are the providers of AT&T services in the United States and around the world. With a powerful array of network resources that includes the nation’s fastest mobile broadband network, AT&T is a leading provider of wireless, Wi-Fi, high speed Internet, voice and cloud-based services. A leader in mobile broadband and emerging 4G capabilities, AT&T also offers the best wireless coverage worldwide of any U.S. carrier, offering the most wireless phones that work in the most countries. It also offers advanced TV services under the AT&T U-verse® and AT&T |DIRECTV brands. The company’s suite of IP-based business communications services is one of the most advanced in the world. In domestic markets, AT&T Advertising Solutions and AT&T Interactive are known for their leadership in local search and advertising.”

AT&T Inc: A Dividend Champion with 28 Consecutive Years of Dividend Increases

Learning from the Past – Looking at Earnings Only

Since dividends are paid out of earnings, a clear perspective of a company’s historical earnings growth record is a vital component of a dividend investor’s prudent due diligence process. The following graph plots AT&T Inc’s earnings per share since 1998. A quick glance to the right of the graph shows that AT&T Inc has increased earnings at a compounded rate of 1.4%%(see purple circle on graph) per annum.

T-1.png

Earnings Determine Market Price and Dividend Income: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings to both price movement and dividend income. The earnings growth rate line or True Worth ™ line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Since dividends are paid out of earnings, and therefore represent additional return on top of what the market capitalizes earnings at, they are depicted by the light blue shaded area and stacked on top of the earnings line. Therefore, a quick visual of these two important components is simultaneously revealed:

1. The additional return that dividend paying stocks provide.

2. The percentage of earnings paid to shareholders as dividends (payout ratio).

The value in this article is through carefully analyzing the earnings and price correlated fundamentally based graphs. Notice that one glance tells you how well the company has performed on an operating basis historically and how the market valued that historical performance. Therefore, the reader is free to discover whether or not current valuations make sense based on historical norms coupled with fundamental values. Instead of opinion, this article is designed to produce facts that can be analyzed to the readers investing benefit.

T-2.png

Performance Table: Capital Appreciation and Dividend Income AT&T Inc

The associated performance results, with the earnings and price correlated graph, validates the above discussion regarding the two components of total return: Capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the -0.8% capital appreciation (Closing Annualized ROR), long-term shareholders of AT&T Inc would have received an additional $49,908.49 in dividends that increased their total return from -0.8% to 2.3% per annum.

(Note: Since this is a Dividend Champion it has raised its dividend every year for at least 25 years, therefore, negative dividend growth rates shown, if any, will be attributed to special additional dividends paid in excess of the company’s regularly reported dividend rate.)

T-3.png

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.

T-4.png

A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for AT&T Inc is 1.52, which is historically low.

T-5.png

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns, and the dividend and its growth rate are a function of two critical determinants:

1. The rate of change (growth rate) of the company's earnings

2. The price or valuation you pay to buy those earnings

Therefore, forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. At its current price, which is attractively aligned with its True Worth™ valuation, AT&T Inc represents a potential opportunity to invest in a Dividend Champion at a reasonable price. The important factor is that AT&T Inc has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for an increasing dividend income stream and potentially attractive future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 34 leading analysts reporting to Capital IQ forecast AT&T Inc’s long-term earnings growth at 6%. AT&T Inc has medium long-term debt at 37% of capital. AT&T Inc is currently trading at a P/E of 14.8, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, AT&T Inc’s True Worth valuation would be $48.76 at the end of 2017, which would be a 11.6% annual rate of return from the current price, including assumed dividends.

T-6.png

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price and dividend income in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in AT&T Inc to an equal investment in 10-year Treasury bonds illustrates that AT&T Inc’s expected earnings would be five times that of the 10-Year T-Bond Interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

T-7.png

This report presents essential "fundamentals at a glance" on Dividend Champion AT&T Inc, illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conduct his or her own due diligence in order to validate whether the consensus estimates seem reasonable or not. Follow the link we provided at the beginning of this article to a fully functioning F.A.S.T. Graphs™ on AT&T Inc.

Summary & Conclusions

AT&T appears to be very reasonably priced with a PE ratio in line with the average company but sporting an above-average current yield. Although dividend growth has not been fast, it has been consistent. Furthermore, we believe that management is committed to maintaining its generous dividend policy and high payout ratio. Consequently, we think AT&T represents a good opportunity to beef up the current yield of the conservative dividend investor’s portfolio.

Disclosure: Long T at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment adviser as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

About the author:

FAST Graphs
F.A.S.T. Graphs™ is a powerful research tool providing "essential fundamentals at a glance" on over 17,000 symbols. F.A.S.T. Graphs™ empowers the user to research stocks deeper and faster by allowing them to exploit the undeniable relationship and functional correlation between long-term earnings growth and market price. Warren Buffett, the greatest capital allocator of all time, said; "there are only two things that investor needs to know; how to value a company and how to think about stock prices." With the F.A.S.T. Graphs™ at their disposal, users are able to perform both of these critical tasks... FAST.

F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.

Visit FAST Graphs's Website


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