Sunday, March 25, 2012

AT&T Stock Analysis

I ran AT&T through my screening process to see where it currently stands. AT&T is closed on Friday 3/23/12 at $31.52.

DCF Valuation:

Analysts expect AT&T to grow 7.78% per year for the next 5 years and I've assumed that after that they will grow at 2.00%. Running those numbers through the DCF analysis with a 10% discount rate gives a value of $37.21. DCF valuation shows that AT&T is currently undervalued by 15.29%.

Graham Number:

Walmart's TTM EPS is $0.67 with a BVPS of $17.81. Using the Graham Number calculation you get a value of $16.39. Using these numbers AT&T is overvalued by approximately 92%; however, the TTM EPS value is artificially low due to the failed buyout of T-Mobile. If you recalculate based off the forecast $2.35 EPS you get $30.69 meaning that AT&T is currently overvalued by approximately 2.71%.

Average High Dividend Yield:

AT&T's average high dividend yield for the prior 10 years is 6.13% and for the previous 5 years it's 6.36%. Based on the 10 year yield, AT&T's low price should be $28.71. The price based on the 5 year yield is $27.67. This means that AT&T is overvalued by 9.80% and 13.93% respectively.

Average Low PE Ratio:

AT&T's average Low PE Ratio for the past 10 years is 14.90. This number is closer to 12 if you take out the current trailing PE ratio of 47 that AT&T has. Using the 10 year average however you get a value of $35.03 based on analyst estimates of $2.35 EPS. This means that AT&T is currently undervalued by approximatley 10%. The 5 year calculations give a price target of $40.95 with a PE ratio of 17.42. These are even more skewed because of the current 47 PE ratio, taking that out you get a PE target of 11.40 with a price target of $26.79.

Dividend Discount Model:

For the DDM I assumed that AT&T will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 2.33%. After that I assumed AT&T can continue to raise dividends by 2.0% and used a discount rate of 7.5%. Based on this AT&T is worth $30.71 meaning it's overvalued by 2.63%.

PE Ratios:

AT&T's trailing PE is 47.04 and it's forward PE is 12.41. The trailing PE is so high due to the payout of the failed T-Mobile acquisition. The CAPE for the previous 10 years is 16.26 and taking out the trailing PE from that calculation gives an CAPE of 15.15.


AT&T's gross margin is for FY 2011 was 45.28% and FY 2010 was 49.04%. I don't like the direction that the gross margin is heading but it is still very high which is nice to see. They're profit for for FY 2011 was 3.11% and FY 2010 was 15.98%. Once again the T-Mobile issue is rearing it's head. The Cash-to-Debt ratio is 0.05. I'm not too worried about the Cash-to-Debt ratio since AT&T is essentially a utility that demands lots of capital investments usually meaning more debt.

Share Buyback:

AT&T's shares outstanding have increased every year since 2008. Most recently it increased another 1.97%.

Dividend Analysis:

Obviously with a company like AT&T you're interested in current yield and not the dividend growth rate. AT&T's current yield is 5.58%. The 1 year growth rate is 2.33%, 3 year 2.38%, 5 year 4.39% and 10 year 5.69%. None of these are barnburning growth rates but if AT&T can get the growth rate closer to 5% it would be very intriguing.

The payout ratio has been fairly steady above the 70% mark. I would prefer that the payout ratio be lower to allow for larger increases but in AT&T's case I think it's prudent to allow a higher payout ratio. Once again, with AT&T your looking for either stability or high current yield not necessarily dividend growth.

Return on Equity and Return on Capital Invested:

AT&T's ROE and ROCI have been all over the place. Between 2001 and 2006 both values were trending down and since then they began expanding again. The following graph shows AT&T's ROE and ROCI since 2001.

Average Price and EPS:

EPS have been all over the place the past 2 years with a huge increase from 2009 to 2010 and then a huge drop off from 2010 to 2011.


The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 10 years. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. Currently AT&T is trading only $5.25 higher than this value.


The average of all the valuation models gives a value of $32.47 which means that AT&T is currently trading at a 2.92% discount to the fair value.

Overall I think that AT&T is slightly overvalued at the current price. I would look to get at least a 6% entry yield which corresponds to a purchase price of $29.33. At that entry price you would begin your accumulation at a 16.5% discount to the average valuation. So in other words AT&T is not a stock I would be purchasing now and I would wait for the price to drop.

Selling puts would be one way to begin purchasing at a good margin of safety; however, the current put premiums would not meet my criteria unless you go out until at least July. And even then you would be looking at a only a 5.15% CAGR if the shares were not put to you.

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