AT&T Inc. is an American multinational corporation that provides telecommunications services to consumers, businesses, and other providers worldwide. Founded in 1983 as SBC Communications Inc. and changed its name to AT&T Inc. in November 2005, is considered the leading company in the telecommunication industry by Fortune 500 ranked as the number 11th; Headquartered in Dallas, Texas AT&T Inc. has 266,590 employees.
AT&T Inc. common stock is listed on the New York Stock Exchange under the symbol of “T” (NYSE: T) making the company one of the 30 stocks that make up the Dow Jones Industrial Average. It is also a Fortune 500 company ranked the largest communications holding company in the world by revenue of $127.4 billions and by net income was $7.539 billion in 2012. Its direct competitor is Verizon Communications with $110,875 millions in revenue and $2,404 millions in profits, 20% bellow of AT&T.
According to its 2012 Annual Report, the company has invested $19.7 billion in project for wireless and mobile capabilities with a 10.6% growth year over year; also $23 billion paid to stockholders and $39.2 billion cash generated from operating activities. AT&T is one of the most honored companies in the world; it has been recognized by industry experts, analysts and media for its innovative products, and services; also for its commitment to the people and to the communities.
2. AT&T’s Life Cycle Analysis Taking in consideration AT&T’s quote cycle life, the company has have a substantial growth which is reflected in the uninterrupted dividends on its common stock since 1984 and increased payments to common shareholders every for 28 consecutive years.
AT&T 10-year quote chart cycleSource: AT&T archives.
The graph describe the trending line of AT&T quotes over the past 10 years, and the company’s phase lifecycle stock, AT&T dividend growth stock has delivered an annualized total return of 2.50% to its shareholders.
From the trending line back in 2003 to 2006 the company had a basing phase with no growth, this was the result of the decision of the company to deliver zero growth in EPS since 2003.
In 2008 the trending line started a growing phase, reaching the top with a closing price of $26.77 on October of that year; after that the company started to present a slight roller coaster phase and again a basing phase started until 2011 that the price of the stock starting to have again a growing phase; as of today AT&T is doing moderately well with its current price as of April 4th,2013,$37.91 but needs to regain its competitive position while also managing slowing growth and commoditization of its lucrative voice revenues.
3. Analysis of Return on Equity
The data used for this analysis is taken from AT&T’s financial statements, also the “T” a will be compare the industry’s current ROE .
The formula to calculate the Return on Equity (ROE) is the following:
ROE= Net Profit/Equity
To calculate the AT&T’s ROE for the 2012 period, the following data was taken from the financial statements (USD $ in millions):
* 2012 AT&T’s Net Profit: 7,264* Stockholders’ Equity: 92,695
Applying the formula:
ROE= Net Profit/Equity x 100
ROE= 7,264/92,695 x 100=7.84%
The 7.84% compare to the industry 13.81% is very low; this percentage means that the company is not as efficient in producing revenue. A five years ROE analysis compare with the industry will show the performance of the company over the years: Table 1: AT&T Inc., Return on Equity (ROE)
Selected Financial data in (USD $ Millions)Details| 2012| 2011| 2010| 2009| 2008|Net Income attributable to AT&T| 7,264| 3,944| 19,864| 12,535| 12,867| S. H. Equity| 92,695| 105,787| 111,950| 102,325| 96,750| Ending December 31st, Years 2012-2008AT&T’s Inc. ROE5 Years AnalysisYear| 2012| 2011| 2012| 2009| 2008|ROE (%)| 7.84| 3.73| 17.74| 12.25| 13.30|Source: Based on data from AT&T Inc. Annual Reports
The table shows AT&T’s ROE for the last 5 years compared to the industry, from 2007 to 2010 the ROE is acceptable but still below the industry average, possibly due to the downturn of the economy, however the company remain strong experienced significant increases in revenues in the wire line, wireless, and the advertising and publishing divisions as a result of the company’s acquisitions, increasing demand for data products, growth in data and voice services, and the addition of BellSouth’s other operations.
In 2011 the company had experienced a huge drop in the ROE, the table shows that the company had have a problem generating profits possibly due to the high competition in the market.
4. AT&T Projected Future Growth Rate of Earnings
The projected future growth rate of AT&T is based on the earning per share EPS of the company, the growth rate is calculated taking in consideration historical EPS from the last three years; according to (NASDAQ, 2012) the following data is given:
Table 2: AT&T’s Earning Per Share (EPS)2 years SummaryAT&T | 2012 | 2011 |EPS | 1.27 | 0.66 |
Source: NASDAQ archives 2012
An estimate growth rate of 61% = 0.61 is calculated from the table E(gr) = 1.27 – 0.66; the estimate EPS for the upcoming year would be 1.88, applying this data to the formula:
EPS GR=Earnings Est. for upcoming year-Current Earnings Current Earnings x 100
EPS= .4803=48.03%Table 3: AT&T’s Projected EPS5 Years AnalysisAT&T| 2012| 2013| 2014| 2015| 2016|EPS| 1.27| 1.88| 2.78| 4.12| 6.10|Applying this to growth rate to have a projected 5 years earning: AT&T present a positive growth in the future, if everything hold constant; according to the 2011 financial report, AT&T still remain the leader company in the telecommunication industry due to the latest investment in project in new technology.
5. AT&T Capital Asset Pricing Model:Capital asset pricing model (CAPM) indicates what should be the required rate of return on risky assets like AT&T’s common stock. To obtain the beta of the company, which is a measure of the risk of an AT&T stock in comparison to the market, three different betas were taking in consideration from different web finance sources in order to get an average: Yahoo Finance: 0.38
Msn Money: 0.53Google Finance: 0.54Average: 0.48
In comparison with the risk of the market of 1 AT&T’s beta is 0.48, which is lower and therefore less risky, this assumption can be justified by the company keeping the leadership on the industry despite the intense competition in the market, to this can be added the investments on new projects in new technology in its wireless and data division by the company, the strong market share and profitability.
The current interest rate for thirty-years Treasury bills is 2.88%, this is the Risk Free Rate (Rrf) according to bloomber.com, and the Risk Market is obtained by subtracting the S&P 500 rate of return (17.75%) and the Risk Free Rate (2.88%) 14.87%, applying the data we have a
CAPM: r = Rrf + b*(rm – Rrf)CAPM: r = 2.88 + 0.48*(14.87 – 2.88)1.3824+ 0.48* 11.991.3824 + 5.7552CAPM: r = 7.14%
This rate will be used to calculate the intrinsic value of the company.
6. AT&T’s Intrinsic Value
Applying the DDM formula using AT&T (T) stock information we have the following outcome:
Vo = Do (1+g)/k – gDo = $0.45 recently dividend paidg = 4.93% stable growth ratek = 7.14% required rate of returnVo = .45 (1 + .0493)/.0714 – .0493Vo =
The intrinsic value is $11.09, when compare this value with the current price $37.49 there is an assumption that the intrinsic value is over price; this underpriced valuation is due possibly to the down in the market meaning that the stock is not in demand because of the low ROE, investor are not attracted by the company.
AT&T it’s a positioned company in a very changing and growing industry where has grown well until recently; it maintain a stable growth which makes the company attractive to investor, also the fact that the have never stop paying dividends, even when the economy hit really hard the company.
8. References:http://www.att.com/gen/press-room?pid=23672&cdvn=news&newsarticleid=35937 http://finance.yahoo.com/q/hp?s=T&a=06&b=19&c=2008&d=11&e=31&f=2013&g=d http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l— http://dividendmonk.com/att-inc-looks-expensive/