Quick Analysis of AT&T

AT&T has surprised me this morning as it has been consistently overvalued due to the demand for it’s high paying dividend. You see; when a company pays a reasonable dividend; investors, through supply and demand, push the price upwards to a more reasonable level of return, which is usually 2% to 4%.

So, if you buy a stock that is $100 with a $5 dividend; this represents a 5% annual return on investment. This is high so investors will usually buy in greater amounts to push the stock higher to a more reasonable return. For example; in the above scenario; you may see the stock pushed to $125 so that the $5 dividend yields 4% instead of 5%. Sometimes the yield stays steady though because of inherent risks associated with the company.

So what surprised me so much about AT&T? Well, AT&T pays 0.51 cents per quarter, which amounts to 2.04 per year. AT&T opened this morning at $30.90, which makes this dividend a 6.7% yield. What’s even more interesting is the Price to Earnings ratio of 20, which tells me the stock is fairly valued at $30.

After the believed synergy savings of the merger with Time Warner; AT&T should have enough cash flow to cover operations and the dividend. The big questions are the following:

  1. Will Investors push this stock higher to even out the dividend return despite the fact that the stock is fairly priced as is.
  2. If investors do not push the stock price higher; will AT&T continue to be a Dividend Champion with 35 years of Dividend increases or will they cut the dividend.

I do not know the answers to the above questions, but here is my guess. I believe question one is a definitive yes. If AT&T can support the dividend; there is no way anyone will let anyone else get a free pass on an “almost” guaranteed 7% return on investment. Based on their free cash flow; I believe the dividend is sustainable; so I believe the answer to number two is, “no.”

These are just my assumptions based on inherent knowledge I have gathered over the years. Make sure you do your own research and due diligence before you invest in anything. That being said, I plan to acquire more shares of AT&T myself.

Matt

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